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Corporate Governance – portrayed in the individual cultural and legal framework, from the standpoint of equity capital.

VIPsight is a dynamic photo archive, sorted by nations and dates, by and for those interested in CG from all over the world.

VIPsight offers, every month:
transparent and independent current information / comments / facts and figures on corporate governance locally and internationally,

  • written by local CG experts,
  • selected and structured by the Club of Florence,
  • financed by its initiator VIP and other sponsors with a background of “Equity and Advisory” interests.

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Jeffrey M. Trinklein  



by Gibson Dunn

Gibson Dunn has surveyed the comment letters submitted by public and private energy companies and related industry associations regarding the proposed rules by the Securities and Exchange Commission (the “SEC” or “Commission”) on climate change disclosure requirements for U.S. public companies and foreign private issuers (the “Proposed Rules”).

Based on our review of these comment letters, we have seen general support for transparent and consistent climate-related disclosures, along with a concern that the Proposed Rules do not reconcile with the SEC’s stated objective “to advance the Commission’s mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation, not to address climate-related issues more generally.” Overarching themes included general support for the Commission’s decision to base the Proposed Rules on the Task Force on Climate-Related Financial Disclosures (“TCFD”) framework and Greenhouse Gas Protocol (“GHG Protocol”), concern with deviation from the long- standing materiality threshold, concern that the Proposed Rules would overload investors with immaterial, uncomparable, or unreliable data, and questions as to whether the Proposed Rules would cause an unintended chilling effect on companies to set internal emissions reduction targets or other climate-related goals to avoid additional liability risks in disclosing such goals. The proposed disclosure requirements receiving the most comments from energy industry companies relate to the Greenhouse Gas (“GHG”) emissions reporting (particularly Scope 3 emissions) and the amendments to financial statement disclosure in Regulation S-X (particularly the 1% materiality threshold). In addition to these higher-level observations, this client alert also provides a more granular review of the energy industry’s comments on specific provisions of the Proposed Rules.

Read more <click here>



23 July 2022


by Gibson Dunn

The calendar below reflects SEC filing deadlines for companies with a fiscal year ending December 31, 2022. For weekends and SEC holidays, the filing deadline is the next business day.

Hours of EDGAR Operations: The hours of operation for submitting filings to the EDGAR system are 6:00 a.m. to 10:00 p.m. Eastern Time weekdays (excluding SEC holidays). If a filing is submitted after 5:30 p.m. Eastern Time, it will not be deemed filed with the SEC until the following business day (except for filings made pursuant to Rule 462(b) and Section 16 filings, which will receive the date of the actual filing if filed by 10:00 pm Eastern Time).

Read more <click here>



26 June 2022


by Gibson Dunn

The Uyghur Forced Labor Prevention Act (“UFLPA” or “Act”)—and its stringent import restrictions— took effect on June 21, 2022.[1] The Act, the latest effort by the United States concerning the Uyghur population in China’s Xinjiang Uyghur Autonomous Region (the “XUAR” or "Xinjiang"), greatly increases the showing that companies need to make to prove that goods produced in the XUAR, in full or in part, are entitled to entry into the United States. All products manufactured in the region or produced by a list of entities that have now been designated by the interagency Forced Labor Enforcement Task Force (“FLETF”) are presumptively barred from entry into the United States unless the importer can present “clear and convincing” evidence that the product has not been tainted by the use of forced labor.[2]

As U.S. Customs and Border Protection (“CBP”) begins to enforce the Act, importers of certain products and products that may incorporate raw materials or manufactured parts or components that are suspected to have touchpoints with the XUAR or with several of China’s “anti-poverty alleviation” programs should be aware of heightened diligence and supply chain tracing requirements necessary to rebut the UFLPA’s presumptive import ban on XUAR-linked shipments.

I. Background As we have shared in past client alerts, the UFLPA is the latest in a long line of U.S. executive and legislative efforts targeting alleged forced labor in the supply chains of goods entering the United States.

For nearly a century, the 1930 Tariff Act has authorized CBP to prevent the importation of “[a]ll goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by . . . forced labor” by issuing Withhold Release Orders (“WROs”).[3] CBP’s authority under the Tariff Act was strengthened in 2016 when Congress eliminated a loophole that allowed importation of merchandise made with forced labor if the merchandise was not also available in the United States in quantities sufficient to meet U.S. consumptive demand.[4]

More recently, the U.S. reaffirmed its broad commitment to preventing imports tainted by forced labor in the 2020 United States-Mexico-Canada Agreement (“USMCA”). Under this free trade agreement, each North American country agreed to “prohibit the importation of goods into its territory from other sources produced in whole or in part by forced or compulsory labor.”[5] To oversee the implementation of this commitment, former President Trump issued an executive order creating the FLETF, chaired by the Secretary of Homeland Security and including representatives from the Departments of State, Treasury, Justice, Labor, and the Office of the U.S. Trade Representative.[6]

The measures described above target forced labor wherever it occurs, but, in recent years, the U.S. has focused increasingly on allegations of forced labor and other human rights abuses in the XUAR. New legislation authorized sanctions for these alleged abuses in 2020,[7] and, in 2021, CBP’s heightened scrutiny of imports from the XUAR led to a region-wide WRO affecting cotton and tomato imports[8] and an additional WRO targeting silica-based products from Xinjiang.[9]

After passing both houses of Congress with broad bipartisan support, President Biden signed the UFLPA into law on December 23, 2021.[10] The UFLPA represents the U.S.’s most forceful effort to date to address this issue in the XUAR. Experts estimate that the UFLPA will have an impact on the global economy “measured in the many billions of dollars.”[11]

The Act’s reach is broad, presumptively banning the importation of “any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in” the XUAR, as well as those produced by a number of entities identified by the FLETF.[12] To rebut this presumptive ban, importers must show: (1) their compliance with all of the Act’s implementing regulations and FLETF’s due diligence guidance,[13] (2) that they responded “completely and substantively” to all agency inquiries,[14] and (3) “clear and convincing evidence” that their goods were not produced with forced labor.[15]

II. FLETF Enforcement Strategy The Act requires the FLETF to promulgate an enforcement strategy[16] which will include specific guidance to importers regarding due diligence, the amount and type of evidence that importers will need to show to rebut the Act’s presumption, and what entities will be presumptively barred.[17] In the months following the UFLPA’s enactment, the FLETF solicited input from the public to inform its eventual Enforcement Strategy,[18] holding a public hearing,[19] and receiving 180 written comments from U.S. and foreign businesses, industry associations, civil society, academics, and private individuals.[20] After the close of this public comment period, the FLETF published its enforcement strategy and submitted it as a report to Congress on June 17, 2022.[21] To supplement this strategy, CBP published “Operational Guidance for Importers“ on June 13, 2022.[22]

Read more <click here>



21 February 2022

McDonald’s says he owns 200 shares

You got these companies making all this money and the animals are just suffering for no reason,” Carl Icahn told Bloomberg.

Two more Icahn minded board members <Leslie Samuelrich and Maisie Ganzler> bringing more friendly live to pigs – before they are cooked by McDonald’s

To learnere : small livestock also makes crap

Next message in McDonald’s annual shareholders meeting on May 20, 2022


27 January 2022

BlackRock, Vanguard and State Street Update Corporate Governance and ESG Policies and Priorities for 2022

by Gibson Dunn

BlackRock, Vanguard and State Street Global Advisors (“State Street”) recently issued their voting policy updates for 2022, as well as guidance about their 2022 priorities for their portfolio companies.  On January 18, 2022, BlackRock’s CEO issued his annual “Letter to CEOs” (available here), following closely on the heels of State Street’s CEO, who issued his annual letter to public company directors (available here) on January 12. 

These pronouncements from the “Big Three” asset managers reflect a number of common themes, including an emphasis on climate and the transition to a Net Zero economy, diversity at the board level and throughout the workforce, and effective human capital management.  Links to the BlackRock and Vanguard voting policies for 2022 are below.  State Street’s voting policy updates span several documents that provide guidance on areas that State Street views as focal points for the coming year.  Links to these documents are also below. 

BlackRock         Proxy Voting Guidelines for U.S. Securities (effective as of January 2022)

Vanguard          Proxy Voting Policy for U.S. Companies (effective as of March 1, 2022)

State Street

- Guidance on Climate-Related Disclosures;

- Disclosure Expectations for Effective Climate Transition Plans;

- Guidance on Diversity Disclosures and Practices;

- Guidance on Managing Director Time Commitments; and

- Guidance on HCM Disclosures & Practices.

1. BlackRock

2022 Letter to CEOs

In his 2022 letter titled “The Power of Capitalism,” BlackRock CEO Larry Fink encourages companies to focus on their purpose and put that purpose at the foundation of their relationships with stakeholders, in order to be valued by their stakeholders and deliver long-term value for their shareholders.  The letter urges companies to think about whether they are creating an environment that helps their employee-stakeholders navigate the new world of work that has emerged from the pandemic.  The letter observes that most stakeholders now expect companies to play a role in moving toward a Net Zero global economy and discusses BlackRock’s approach to climate and sustainability.  This is a priority area for BlackRock because of its need, as a capitalist and fiduciary to its clients, to understand how companies are adjusting their business to massive changes in the economy.  Mr. Fink also emphasizes that divesting from entire sectors, or simply passing carbon-intensive assets from public to private markets, will not move the world to Net Zero.  BlackRock does not pursue divestment from oil and gas companies as a policy, but believes that action by “foresighted companies” in a variety of carbon-intensive industries is a critical part of the transition to a greener economy.  Government participation on the policy, regulatory and disclosure fronts is also critical because, Mr. Fink notes, “businesses can’t do this alone, and they cannot be the climate police.” 

The letter concludes with a reminder that BlackRock has built a stewardship team so it can understand companies’ progress throughout the year, and not just during proxy season.  BlackRock previously announced an initiative to give more of its clients the option to vote their own holdings, rather than BlackRock casting votes on their behalf.  The letter notes that this option is now available to certain institutional clients, including pension funds that support 60 million people.  The letter also commits to expanding that universe as BlackRock is committed to a future where every investor, including individual investors, have the option to participate in the proxy voting process.

2022 BlackRock Voting Policy Updates

30% Target on Board Diversity 

BlackRock believes boards should aspire to 30% diversity, and encourages companies to have at least two directors who identify as female and at least one who identifies as being from an “underrepresented group.”  The definition of “underrepresented group” is broad and includes individuals who identify as racial or ethnic minorities, LGBTQ+, underrepresented based on national, Indigenous, religious or cultural identity, individuals with disabilities and veterans.  Although the wording of the policy is aspirational, insufficient board diversity was a top reason BlackRock opposed the election of directors in 2021. 

Board Diversity Disclosure

BlackRock updated its expectations for disclosure about board diversity.  It asks that companies disclose how the diversity characteristics of the board, in aggregate, are aligned with a company’s long-term strategy and business model, and whether a diverse slate of nominees is considered for all available board seats.

Votes on Compensation Committee Members

BlackRock appears to be strengthening its position on votes for compensation committee members where there is a lack of alignment between pay and performance.  In that situation, BlackRock will vote “against” the say-on-pay proposal and relevant compensation committee members (rather than simply “considering” negative votes for committee members). 

Sustainability Reporting

BlackRock will continue to ask that companies report in accordance with the Task Force on Climate-related Financial Disclosure (“TCFD”) framework.  In recognition of continuing advances in sustainability reporting standards, the 2022 voting guidelines recognize that in addition to TCFD, many companies report using industry-specific metrics other than those developed by the Sustainability Accounting Standards Board (“SASB”).  For those companies, BlackRock asks that they highlight metrics that are industry- or company- specific.  It also recommends that companies disclose any multinational standards they have adopted, any industry initiatives in which they participate, any peer group benchmarking undertaken, and any assurance processes to help investors understand their approach to sustainable and responsible business conduct.

Climate Risk

BlackRock continues to ask companies to disclose Net Zero-aligned business plans that are consistent with their business model and sector.  For 2022, it is encouraging companies to: (1) demonstrate that their plans are resilient under likely decarbonization pathways and the global aspiration to limit warming to 1.5°C; and (2) disclose how considerations related to having a reliable energy supply and a “just transition” (that protects the most vulnerable from energy price shocks and economic dislocation) affect their plans.  BlackRock also updated its voting policies to reflect its existing approach of signaling concerns about a company’s plans or disclosures in its votes on directors, particularly at companies facing material climate risks.  In determining how to vote, it will continue to assess whether a company’s disclosures are aligned with the TCFD and provide short-, medium-, and long-term reduction targets for Scope 1 and 2 emissions.

ESG Performance Metrics

BlackRock does not have a position on the use of ESG performance metrics, but it believes that where companies choose to use them, they should be relevant to the company’s business and strategy, clearly articulated, and appropriately rigorous, like other financial and non-financial performance metrics.

Votes on Committee Members at Controlled Companies

BlackRock may vote “against,” or “withhold” votes from, directors serving on “key” committees (audit, compensation, nominating/governance), that it does not consider to be independent, including at controlled companies.  Previously, this policy was limited to votes on insiders or affiliates serving on the audit committee, and did not extend to other committees.

2. Vanguard

Vanguard’s voting policy updates address several of the same areas as BlackRock’s, including oversight of climate risk, and board diversity and related disclosures.  The introduction to the voting policies also contains more explicit language emphasizing that proposals often require fact-intensive analyses based on an expansive set of factors, and that proposals are voted case-by-case at the direction of the boards of individual Vanguard funds.

Climate Risk Oversight “Failures”

Vanguard’s voting policies outline certain situations in which funds will oppose the re-election of directors on “accountability” grounds—that is, “because of governance failings or as a means to escalate other issues that remain unaddressed by a company.”  Under Vanguard’s current policies, funds will consider votes “against,” or “withhold” votes from, directors or a committee for governance or material risk oversight failures. 

For 2022, Vanguard has updated this policy to clarify that in cases where there is a risk oversight “failure,” funds will generally vote “against,” or “withhold” votes from, the chair of the committee responsible for overseeing a particular material risk (or the lead independent director and board chair, if a risk does not fall under the purview of a specific committee).  The policy has also been updated to reflect that it covers material social and environmental risks, including climate change.  On the subject of climate change, the updated policy lists factors that funds will consider in evaluating whether board oversight of climate risk is appropriate, including: (1) the materiality of the risk; (2) the effectiveness of disclosures to enable the market to understand and price the risk; (3) whether a company has disclosed business strategies, including reasonable risk mitigation plans in the context of anticipated regulatory requirements and changes in market activity, in line with the Paris Agreement or subsequent agreements; and (4) company specific-context, regulations and expectations.  Funds will also consider the board’s overall governance of climate risk and the effectiveness of its independent oversight of this area.

Board Diversity and Qualifications

For 2022, Vanguard has clarified its expectations on disclosure about board diversity and qualifications.  The policy states that boards can inform shareholders about the board’s current composition and related strategy by disclosing at least: (1) statements about the board’s intended composition strategy, including expectations for year-over-year progress, from the nominating/governance committee or other relevant directors; (2) policies for promoting progress toward greater board diversity; and (3) current attributes of the board’s composition.  The policy states that board diversity disclosure should cover, at a minimum, the genders, races, ethnicities, tenures, skills and experience that are represented on the board.  While disclosure about self-identified personal characteristics such as race and ethnicity can be presented at the aggregate or individual level, Vanguard expects to see disclosure about tenure, skills and experience at the individual level. 

Under its policy on board “accountability” votes, a lack of progress on board diversity and/or disclosures about board diversity may lead to votes “against,” or “withhold” votes from, the chair of the nominating/governance committee.  Vanguard has updated this policy for 2022 to reflect its expectations about the various dimensions of diversity (gender, race, etc.) that should be represented on boards and about companies’ disclosures.  The policy includes a reminder that “many boards still have an opportunity to increase diversity across different dimensions,” and that these boards “should demonstrate how they intend to continue making progress.”  

Director Overboarding

Vanguard has clarified how its overboarding policy applies to directors who are named executive officers (NEOs).  Although Vanguard’s limit of two public company boards remains in place, the policy updates clarify that the two boards could consist of either the NEO’s own board and one outside board, or two outside boards if an NEO does not sit on the board at their own company.  Vanguard funds will generally oppose the election of directors who exceed this limit at their outside board(s), but not at the company where they are an NEO.

For other directors, Vanguard’s existing limit of four public company boards is unchanged.

Vanguard funds will also look for companies to have good governance practices on director commitments, including adopting a policy on outside board service and disclosure about how the board oversees the policy.

Unilateral Board Adoption of Exclusive Forum Provisions

Vanguard has updated its voting policy on board “accountability” votes where a company adopts policies limiting shareholder rights.  Under this policy, Vanguard funds will generally oppose the election of the independent board chair or lead director, and the members of the nominating/governance committee, in response to unilateral board actions that “meaningfully limit” shareholder rights.  For 2022, this policy has been updated to specify that these board actions may include the adoption of an exclusive forum provision without shareholder approval.

Proposals on Virtual and Hybrid Shareholder Meetings

According to Vanguard, data show that virtual meetings can increase shareholder participation and reduce costs.  Vanguard funds will consider supporting proposals on virtual meetings if meeting procedures and requirements are disclosed ahead of time, there is a formal process for shareholders to submit questions, real-time video footage is available, shareholders can call into the meeting or send recorded messages, and shareholder rights are not unreasonably curtailed.

3. State Street

In his letter, State Street CEO Cyrus Taraporevala announces that in 2022, State Street’s main focus “will be to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.”  To that end, the letter attaches three guidance documents outlining State Street’s expectations and voting policies for the 2022 proxy season in the areas of climate change and diversity, equity and inclusion.  State Street has also published other guidance documents on director overboarding/time commitments and human capital for the 2022 proxy season. 

The guidance documents are worth reading in their entirety because they provide detailed information about the practices and disclosures State Street expects to see from its portfolio companies in both 2022 and 2023, and about State Street’s related voting policies.  A summary of the key highlights is below.  

Corporate Climate Disclosures


State Street expects all companies in its portfolio to provide disclosures in accordance with the four pillars of the TCFD framework: governance, strategy, risk management, and metrics and targets.  In approaching its disclosure expectations, State Street will begin by engaging with companies.  The guidance document includes a list of questions (organized by the four TCFD pillars) that State Street may ask companies as part of its engagement efforts.

For companies that it believes are not making sufficient progress after engagement, State Street will consider taking action through its votes on directors and/or shareholder proposals.  Starting in 2022, at S&P 500 companies, State Street may vote against the independent board leader if a company fails to provide sufficient disclosure in accordance with the TCFD framework, including about board oversight of climate-related risks and opportunities, total Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions, and targets for reducing GHG emissions. 

Companies in “Carbon-Intensive Sectors”

For several years, State Street has had specific disclosure expectations for companies in “carbon-intensive sectors” (oil and gas, utilities and mining), and the guidance document outlines what State Street expects to see beginning in 2022.  Disclosures are expected to address: (1) interim GHG emissions reductions targets to accompany long-term climate ambitions; (2) discussion of the impacts of scenario-planning on strategy and financial planning; (3) use of carbon pricing in capital allocation decisions; and (4) Scope 1, Scope 2 and material categories of Scope 3 emissions. 

Climate Change Shareholder Proposals

State Street will evaluate climate-related shareholder proposals on a case-by-case basis, taking into account factors that include the reasonableness of a proposal, alignment with the TCFD framework and SASB standards where relevant, emergent market and industry trends, peer performance, and dialogue with the board, management and other stakeholders.  For companies in carbon-intensive sectors, State Street will consider alignment with its disclosure expectations specific to these companies.  The guidance also addresses specific factors State Street will consider in assessing climate-related lobbying proposals.

Climate Transition Plan Disclosures

Related to the broader subject of climate disclosures, State Street has also issued guidance specific to disclosures about companies’ climate transition plans.  In the guidance, State Street notes that there is no one-size-fits-all approach to reaching Net Zero, and that climate-related risks and opportunities are highly nuanced across and within industries.  It plans to continue developing its disclosure expectations over time, including taking into account any disclosures mandated by regulators.  In his letter, State Street CEO Cyrus Taraporevala emphasizes that what State Street is seeking from climate transition plans, as a long-term investor, “is not purity but pragmatic clarity around how and why a particular transition plan helps a company make meaningful progress.”  Mr. Taraporevala also emphasizes the need to take a big-picture look at whether the climate commitments individual companies make have the effect of reducing climate impacts at the aggregate level.  In this regard, he observes that so-called “brown-spinning” (public companies selling off their highest-emitting assets to private equity or other market participants), “reduces disclosure, shields polluters, and allows the publicly-traded company to appear more ‘green,’ without any overall reduction in the level of emissions on the planet.”  State Street recognizes that in the near term, additional investments in light fossil fuels may be necessary to propel the transition to Net Zero. 

In light of these considerations, State Street intends its guidance document on climate transition plans as a “first step” to provide transparency about the core criteria State Street expects companies to address in developing their plans.  These criteria are organized into ten categories that generally align with those found in two external frameworks: the Institutional Investors Group on Climate Change (IIGCC) Net Zero Investment Framework and Climate Action 100+ Net-Zero Company Benchmark.  The criteria include decarbonization strategy, capital allocation, climate governance, climate policy and stakeholder engagement. 

As a companion to its 2022 policy on holding independent board leaders accountable for climate disclosures (discussed above), this year, State Street plans to launch an engagement campaign on climate transition plan disclosure targeted at “significant emitters in carbon-intensive sectors.”  Starting in 2023, it will hold directors at these companies accountable if their company fails to show adequate progress in meeting its climate transition disclosure expectations. 

Diversity Disclosures

State Street’s guidance document lists five topics it expects all of its portfolio companies to address in their diversity disclosures:

- Board oversight—How the board oversees the company’s diversity, equity and inclusion efforts, including the potential impacts of products and services on diverse communities;

- Strategy—The company’s timebound and specific diversity goals (related to gender, race and ethnicity at a minimum), the policies and programs in place to meet these goals, and how they are measured, managed and progressing;

- Goals—Same as Strategy.

- Metrics—Measures of the diversity of the company’s global workforce and board. For employees, this should include diversity by gender, race and ethnicity (at a minimum) where permitted by law, broken down by industry-relevant employment categories or seniority levels, for all full-time employees.  In the U.S., companies are expected to use the disclosure framework from the EEO-1 at a minimum.  For the board, disclosures should be provided by gender, race and ethnicity (at a minimum), and can be on an aggregate or individual level; and

- Board diversity—Efforts to achieve diversity at the board level, including how the nominating/governance committee ensures diverse candidates are considered as part of the recruitment process.

State Street also encourages companies to consider providing disclosures about other dimensions of diversity (LGBTQ+, disabilities, etc.), as it views these attributes as furthering the overarching goal of contributing to the diversity of thought on boards and in the workforce.

Diversity and Proxy Voting

State Street will consider disclosures about board diversity in deciding how to vote on directors, as follows: 

Racial/Ethnic Diversity – S&P 500 Companies

In 2022, State Street will vote “against,” or “withhold” votes from:

- The chair of the nominating/ governance committee if the company does not disclose the racial and ethnic composition of its board, either at the aggregate or individual level;

- The chair of the nominating/ governance committee if the company does not have at least one director from “an underrepresented racial or ethnic community”; and

- The chair of the compensation committee, if the company does not disclose its EEO-1 report, with acceptable disclosure including the original report, or the exact content of the report translated into custom graphics.

Gender Diversity

State Street may vote “against,” or “withhold” votes from, the chair of the nominating/governance committee:

- Beginning in 2022, for companies in all markets, if there is not at least one female director on the board; and

- Beginning in 2023, at Russell 3000 companies, if the board does not have at least 30% female directors. State Street may waive this policy if a company engages with it and provides a specific, timebound plan for reaching 30%.

If a company fails to meet the gender diversity expectations for three consecutive years, State Street may vote against all incumbent nominating/governance committee members.  

The guidance also outlines State Street’s approach to voting on diversity-related shareholder proposals, including specific criteria relating to proposals seeking reporting on diversity, “pay gap” proposals, and proposals seeking racial equity audits. 

State Street notes that its voting policies currently focus on increasing board diversity, but that in coming years it intends to shift its focus to the workforce and executive levels.  Related to the subject of workforce diversity, the guidance previews ten recommended areas of focus for boards in overseeing racial and ethnic diversity.  These are addressed in more detail in a publication issued by State Street in partnership with Russell Reynolds and the Ford Foundation.  

Director Overboarding

For 2022, State Street is moving toward an approach that relies more heavily on nominating/governance committee oversight (and enhanced disclosures) about whether directors have enough time to fulfill their commitments.  The updated approach is designed to ensure that nominating/governance committees are evaluating directors’ time commitments, regularly assessing director effectiveness, and providing disclosure about their policies and efforts.  State Street cites two factors as the key drivers of these updates: its own research showing that boards with overcommitted directors have been slower to adopt leading governance practices and provide robust shareholder rights, and concerns about “tokenism” (nominating already-overcommitted diverse directors) and the need to broaden the candidate pools of diverse directors.  The policy updates also address service on SPAC boards.

As a result of the policy updates, beginning in March 2022, State Street will apply the following overboarding limits to directors:

- For board chairs or lead directors, three public company boards; and

- Other director nominees who are not public company NEOs, four public company boards.

State Street may consider waiving these limits and support a director’s election if the company discloses its policy on outside board seats.  This policy (or the related disclosure) must include:

- A numerical limit on public company board seats that does not exceed State Street policies by more than one;

- Consideration of public company board leadership positions;

- An affirmation that all directors are currently in compliance with the policy; and

- A description of the nominating/governance committee’s annual process for review outside board commitments.

This waiver policy will not apply to public company NEOs, who remain subject to State Street’s existing limit of two public company boards.

In calculating outside boards, State Street will not count mutual fund boards or SPAC boards, but it expects the nominating/governance committee to consider these boards in evaluating directors’ time commitments.

Human Capital Management (HCM) Disclosures and Practices

State Street’s guidance document lists the five topics it expects companies to address in their HCM disclosures: (1) board oversight; (2) strategy (specifically, how a company’s approach to HCM advances its overall long-term business strategy); (3) compensation, and how it helps to attract and retain employees and incentivize contributions to an effective HCM strategy; (4) “voice” (how companies solicit and act on employee feedback, and how the workforce is engaged in the organization); and (5) how the company advances diversity, equity and inclusion.

State Street emphasizes that it expects companies to provide specificity on these subjects.  For example, rather than disclosing that employees are surveyed regularly, State Street suggests that companies disclose survey frequency, examples of questions asked, and relevant examples of actions taken in response to employee feedback.  State Street also encourages companies to consider emerging disclosure frameworks, such as the framework outlined by the Human Capital Management Coalition, which includes 35 institutional investors representing over $6.6 trillion in assets.

State Street will approach HCM issues by starting with engagement, focusing on the companies and industries with the greatest HCM risks and opportunities.  For companies that it believes are not making sufficient progress after engagement, State Street will consider taking action through its votes on directors and/or shareholder proposals.  It will consider supporting shareholder proposals at companies whose HCM disclosures are not sufficiently aligned with State Street’s disclosure expectations. 



16 December 2021

ISS and Glass Lewis Issue Voting Policy Updates for 2022

by Gibson Dunn

Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2022 proxy season.  The ISS U.S. policy updates are available here.  The ISS updates will apply for shareholder meetings on or after February 1, 2022, except for those policies subject to a transition period.  ISS plans to release an updated Frequently Asked Questions document that will include more information about its policy changes in the coming weeks.[1] 

The Glass Lewis updates are included in its 2022 U.S. Policy Guidelines and the 2022 ESG Initiatives Policy Guidelines, which cover shareholder proposals.  Both documents are available here.  The Glass Lewis 2022 voting guidelines will apply for shareholder meetings held on or after January 1, 2022. 

This alert reviews the ISS and Glass Lewis updates.  Both firms have announced policy updates on the topics of board diversity, multi-class stock structures, and climate-related management and shareholder proposals.  Glass Lewis also issued several policy updates that focus on nominating/governance committee chairs, as well new policies specific to special purpose acquisition companies (“SPACs”).

A. Board Diversity

- ISS – Racial/Ethnic Diversity. At S&P 1500 and Russell 3000 companies, beginning in 2022, ISS will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) if the board “has no apparent racially or ethnically diverse members.”  This policy was announced last year, with a one-year transition.  There is an exception for companies where there was at least one racially or ethnically diverse director at the prior annual meeting and the board makes a firm commitment to appoint at least one such director within a year.

- ISS – Gender Diversity. ISS announced that, beginning in 2023, it will expand its policy on gender diversity, which since 2020 has applied to S&P 1500 and Russell 3000 companies, to all other companies.  Under this policy, ISS generally recommends “against” or “withhold” votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) where there are no women on the board.  The policy includes an exception analogous to the one in the voting policy on racial/ethnic diversity.

- Glass Lewis – Gender Diversity. Beginning in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee at Russell 3000 companies that do not have at least two gender diverse directors (as announced in connection with its 2021 policy updates), or the entire committee if there is no gender diversity on the board.  In 2023, Glass Lewis will move to a percentage-based approach and issue negative voting recommendations for the nominating/governance committee chair if the board is not at least 30% gender diverse.  Glass Lewis is using the term “gender diverse” in order to include individuals who identify as non-binary.  Glass Lewis also updated its policies to reflect that it will recommend in accordance with mandatory board composition requirements in applicable state laws, whether they relate to gender or other forms of diversity.  It will not issue negative voting recommendations for directors where applicable state laws do not mandate board composition requirements, are non-binding, or only impose reporting requirements.

- Glass Lewis – Diversity Disclosures. With respect to disclosure about director diversity and skills, for 2021, Glass Lewis had announced that it would begin tracking companies’ diversity disclosures in four categories: (1) the percentage of racial/ethnic diversity represented on the board; (2) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (3) whether the board has a policy requiring women and other diverse individuals to be part of the director candidate pool; and (4) board skills disclosure.  For S&P 500 companies, beginning in 2022, Glass Lewis may recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company fails to provide any disclosure in each of these four categories.  Beginning in 2023, it will generally oppose election of the committee chair at S&P 500 companies that have not provided any aggregate or individual disclosure about the racial/ethnic demographics of the board. 

B. Companies with Multi-Class Stock or Other Unequal Voting Rights

- ISS. ISS announced that, after a one-year transition period, in 2023, it will begin issuing adverse voting recommendations with respect to directors at all U.S. companies with unequal voting rights.  Stock with “unequal voting rights” includes multi-class stock structures, as well as less common practices such as maintaining classes of stock that are not entitled to vote on the same ballot items or nominees, and loyalty shares (stock with time-phased voting rights).  ISS’s policy since 2015 has been to recommend “against” or “withhold” votes for directors of newly-public companies that have multiple classes of stock with unequal voting rights or certain other “poor” governance provisions that are not subject to a reasonable sunset, including classified boards and supermajority voting requirements to amend the governing documents.  Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so were not subject to this policy.  ISS had sought public comment about whether, in connection with the potential expansion of this policy to all U.S. companies, the policy should apply to all or only some nominees.  The final policy does not specify, saying that the adverse voting recommendations may apply to “directors individually, committee members, or the entire board” (except new nominees, who will be evaluated case-by-case).  For 2022, the current policy would continue to apply to newly-public companies.  ISS tweaked the policy language to reflect that a “newly added reasonable sunset” would prevent negative voting recommendations in subsequent years.  ISS considers a sunset period reasonable if it is no more than seven years.

- Glass Lewis. Beginning in 2022, Glass Lewis will recommend “against” or “withhold” votes for the chair of the nominating/governance committee at companies that have multi-class share structures with unequal voting rights if they are not subject to a “reasonable” sunset (generally seven years or less).

C. Climate-Related Proposals and Board Accountability at “High-Impact” Companies

ISS – Say on Climate. In 2021, both shareholders and management submitted Say on Climate proposals.  For 2022, ISS is adopting voting policies that document the frameworks it has developed for analyzing these proposals, as supplemented by feedback from ISS’s 2021 policy development process.  Under the new policies, ISS will recommend votes case-by-case on both management and shareholder proposals, taking into consideration a list of factors set forth in each policy.  For management proposals asking shareholders to approve a company’s climate transition action plan, ISS will focus on “the completeness and rigor of the plan,” including the extent to which a company’s climate-related disclosures align with Task Force on Climate-related Financial Disclosure (“TCFD”) recommendations and other market standards, disclosure of the company’s operational and supply chain greenhouse gas (“GHG”) emissions (Scopes 1, 2 and 3), and whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2 and 3) by 2050.  For shareholder proposals requesting Say on Climate votes or other climate-related actions (such as a report outlining a company’s GHG emissions levels and reduction targets), ISS will recommend votes case-by-case taking into account information such as the completeness and rigor of a company’s climate-related disclosures and the company’s actual GHG emissions performance.

- ISS – Board Accountability on Climate at High-Impact Companies. ISS also adopted a new policy applicable to companies that are “significant GHG emitters” through their operations or value chain.  For 2022, these are companies that Climate Action 100+ has identified as disproportionately responsible for GHG emissions.  During 2022, ISS will generally recommend “against” or “withhold” votes for the responsible committee chair in cases where ISS determines a company is not taking minimum steps needed to understand, assess and mitigate climate change risks to the company and the larger economy.  Expectations about the minimum steps that are sufficient “will increase over time.”  For 2022, minimum steps are detailed disclosure of climate-related risks (such as according to the TCFD framework”) and “appropriate GHG emissions reduction targets,” which ISS considers “any well-defined GHG reduction targets.”  Targets for Scope 3 emissions are not required for 2022, but targets should cover at least a significant portion of the company’s direct emissions.  For 2022, ISS plans to provide additional data in its voting analyses on all Climate Action 100+ companies to assist its clients in making voting decisions and in their engagement efforts.  As a result of this new policy, companies on the Climate Action 100 + list should be aware that the policy requires both disclosure in accordance with a recognized framework, and quantitative GHG reduction targets, and that ISS plans to address its new climate policies in its updated FAQs, so there may be more specifics about this policy when the FAQs are released.

- Glass Lewis – Say on Climate. Glass Lewis also added a policy on Say on Climate proposals for 2022, but takes a different approach from ISS.  Glass Lewis supports robust disclosure about companies’ climate change strategies.  However, it has concerns with Say on Climate votes because it views the setting of long-term strategy (which it believes includes climate strategy) as the province of the board and believes shareholders may not have the information necessary to make fully informed voting decisions in this area.  In evaluating management proposals asking shareholders to approve a company’s climate transition plans, Glass Lewis will evaluate the “governance of the Say on Climate vote” (the board’s role in setting strategy in light of the Say on Climate vote, how the board intends to interpret the results of the vote, and the company’s engagement efforts with shareholders) and the quality of the plan on a case-by-case basis.  Glass Lewis expects companies to clearly identify their climate plans “in a distinct and easily understandable document,” which it believes should align with the TCFD framework.  Glass Lewis will generally oppose shareholder proposals seeking to approve climate transition plans or to adopt a Say on Climate vote, but will take into account the request in the proposal and company-specific factors.    

D. Additional ISS Updates

ISS adopted the following additional updates of note:

1. Shareholder Proposals Seeking Racial Equity Audits. ISS adopted a formal policy reflecting its approach to shareholder proposals asking companies to oversee an independent racial equity or civil rights audit.  These proposals, which were new for 2021, are expected to return again in 2022 given the continued public focus on issues related to race and equality.  ISS will recommend votes case-by-case on these proposals, taking into account several factors listed in its new policy.  These factors focus on a company’s processes or framework for addressing racial inequity and discrimination internally, its public statements and track record on racial justice, and whether the company’s actions are aligned with market norms on civil rights and racial/ethnic diversity.

2. Capital Authorizations. ISS adopted what it characterizes as “minor” and “clarifying” changes to its voting policies on common and preferred stock authorizations.  For both policies, ISS will apply the same dilution limits to underperforming companies, and will no longer treat companies with total shareholder returns in the bottom 10% of the U.S. market differently.  ISS also clarified that problematic uses of capital that would lead to a vote “against” a proposed share increase include long-term poison pills that are not shareholder-approved, rather than just poison pills adopted in the last three years.  ISS reorganized the policy on common stock authorizations to distinguish between general and specific uses of capital and to clarify the hierarchy of factors it considers in applying the policy.

3. Three-Year Burn Rate Calculation for Equity Plans. Beginning in 2023, ISS will move to a “Value-Adjusted Burn Rate” in analyzing equity plans.  ISS believes this will more accurately measure the value of recently granted equity awards, using a methodology that more precisely measures the value of option grants and calculations that are more readily understood by the market (actual stock price for full-value awards, and the Black-Scholes value for stock options).  According to ISS, when the current methodology was adopted, resource limitations prevented it from doing the more extensive calculations needed for the Value-Adjusted Burn Rate. 

4. Updated FAQs on ISS Compensation Policies and COVID-19. ISS also issued an updated set of FAQs (available here) with guidance on how it intends to approach COVID-related pay decisions in conducting its pay-for-performance qualitative evaluation.  According to the FAQs, many investors believe that boards are now positioned to return to annual incentive program structures as they existed prior to the pandemic.  Accordingly, the FAQs reflect that ISS plans to return to its pre-pandemic approach on mid-year changes to metrics, targets and measurement periods, and on company responsiveness where a say-on-pay proposal gets less than 70% support. 

E. Additional Glass Lewis Updates

Glass Lewis adopted several additional updates, as outlined below.  Where relevant, for purposes of comparison, the discussion also addresses how ISS approaches the issue.

1. Waiver of Retirement or Tenure Policies. Glass Lewis appears to be taking a stronger stance on boards that waive their retirement or tenure policies.  Beginning in 2022, if the board waives a retirement age or term limit for two or more years in a row, Glass Lewis will generally recommend “against” or “withhold” votes for the nominating/governance committee chair, unless a company provides a “compelling rationale” for the waiver.  By way of comparison, ISS does not have an analogous policy.

2. Adoption of Exclusive Forum Clauses Without Shareholder Approval. Under its existing policies, Glass Lewis generally recommends “against” or “withhold” votes for the nominating/governance committee chair at companies that adopted an exclusive forum clause during the past year without shareholder approval.  With a growing number of companies adopting exclusive forum clauses that apply to claims under the Securities Act of 1933, Glass Lewis updated its policy to reflect that the policy applies to the adoption of state and/or federal exclusive forum clauses.  The existing exception will remain in place for clauses that are “narrowly crafted to suit the particular circumstances” facing a company and/or include a reasonable sunset provision.  By way of comparison, ISS does not have an analogous policy.

3. Board Oversight of E&S Issues. For S&P 500 companies, starting in 2022, Glass Lewis will generally recommend “against” or “withhold” votes for the chair of the nominating/governance committee if a company does not provide “explicit disclosure” about the board’s role in overseeing environmental and social issues.  This policy is taking effect after a transition year in which Glass Lewis noted concerns about disclosures it did not view as adequate.  For 2022, Glass Lewis also will take the same approach for Russell 1000 companies that it took last year with S&P 500 companies, noting a concern where there is a lack of “clear disclosure” about which committees or directors are charged with oversight of E&S issues.  Glass Lewis does not express a preference for a particular oversight structure, stating that boards should select the structure they believe is best for them.

4. Independence Standard on Direct Payments for Directors. In evaluating director independence, Glass Lewis treats a director as not independent if the director is paid to perform services for the company (other than serving on the board) and the payments exceed $50,000 or no amount is disclosed.  Glass Lewis clarified that this standard also captures payments to firms where a director is the principal or majority owner.  By way of comparison, ISS’s independence standards likewise cover situations where a director is a partner or controlling shareholder in an entity that has business relationships with the company in excess of numerical thresholds used by ISS.

5. Approach to Committee Chairs at Companies with Classified Boards. A number of Glass Lewis’ voting policies focus on committee chairs because it believes the chair has “primary responsibility” for a committee’s actions.  Currently, if Glass Lewis policies would lead to a negative voting recommendation for a committee chair, but the chair is not up for election because the board is classified, Glass Lewis notes a concern with respect to the chair in its proxy voting analysis.  Beginning in 2022, this policy will change and if Glass Lewis has identified “multiple concerns,” it will generally issue (on a case-by-case basis) negative voting recommendations for other committee members who are up for election.

6. Written Consent Shareholder Proposals. Glass Lewis documented its approach to shareholder proposals asking companies to lower the ownership threshold required for shareholders to act by written consent.  It will generally recommend in favor of these proposals if a company has no special meeting right or the special meeting ownership threshold is over 15%.  Glass Lewis will continue its existing policy of opposing proposals to adopt written consent if a company has a special meeting threshold of 15% or lower and “reasonable” proxy access provisions.  By way of comparison, ISS generally supports proposals to adopt written consent, taking into account a variety of factors including the ownership threshold.  It will recommend votes case-by-case only if a company has an “unfettered” special meeting right with a 10% ownership threshold and other “good” governance practices, including majority voting in uncontested director elections and an annually elected board.

7. SPAC Governance. Glass Lewis added voting guidelines that are specific to the SPAC context.  When evaluating companies that have gone public through a de-SPAC transaction during the past year, it will review their governance practices to assess “whether shareholder rights are being severely restricted indefinitely” and whether restrictive provisions were submitted to an advisory vote at the meeting where shareholders voted on the de-SPAC transaction.  If the board adopted certain practices prior to the transaction (such as a multi-class stock structure or a poison pill, classified board or other anti-takeover device), Glass Lewis will generally recommend “against” or “withhold” votes for all directors who served at the time the de-SPAC entity became publicly traded if the board: (a) did not also submit these provisions for a shareholder advisory vote at the meeting where the shareholders voted on the de-SPAC transaction; or (b) did not also commit to submitting the provisions for shareholder approval at the company’s first annual meeting after the de-SPAC transaction; or (c) did not also provide for a reasonable sunset (three to five years for a poison pill or classified board and seven years or less for multi-class stock structures).  By way of comparison, as discussed above, for several years, ISS has had voting policies that address “poor” governance provisions at newly-public companies, including multiple classes of stock with unequal voting rights, classified boards and supermajority voting requirements to amend the governing documents.  For 2022, ISS has clarified that the definition of “newly-public companies” includes SPACs.

8. "Overboarding” and SPAC Board Seats. Under its “overboarding” policies, Glass Lewis generally recommends “against” or “withhold” votes for directors who are public company executives if they serve on a total of more than two public company boards.  It applies a higher limit of five public company boards for other directors.  The 2022 policy updates clarify that where a director’s only executive role is at a SPAC, the higher limit will apply.

By way of comparison, ISS treats SPAC CEOs the same as other public company CEOs, on the grounds that a SPAC CEO “has a time-consuming job: to find a suitable target and consummate a transaction within a limited time period.”  Accordingly, SPAC CEOs are subject to the same overboarding limit ISS applies to other public company CEOs (two public company boards besides their own).  

[1]   ISS also issued an updated set of FAQs on COVID-related compensation decisions.



8 November 2021

ISS Proposes and Opens Comment on Draft 2022 Voting Policy Updates

by Gibson Dunn

Yesterday, the proxy advisory firm Institutional Shareholder Services (“ISS") proposed and published for comment voting policy changes for the 2022 proxy season.  There are five proposed updates that would apply to U.S. companies, including two related to “Say on Climate" proposals and a third related to climate issues.

In addition, ISS is proposing (starting in 2023) to begin issuing negative voting recommendations for directors at all companies with multi-class stock structures.  Companies that went public before 2015 would no longer be grandfathered under ISS policy.  ISS is requesting comment on whether to take a similar approach for companies that have other “poor" governance practices—specifically, a classified board, or the requirement of a supermajority vote to amend the governing documents. 

The proposed U.S. policy changes are available here and are summarized below.  Comments on the proposals can be submitted by e-mail to This email address is being protected from spambots. You need JavaScript enabled to view it. until 5 p.m. ET on November 16, 2021.  ISS will take the comments into account as part of its policy review and expects to release final changes to its voting policies by or around the end of November.  It is important to note that ISS's final 2022 proxy voting policies may reflect additional changes, beyond those on which ISS is soliciting comment.  The final voting policies will apply to shareholder meetings held on or after February 1, 2022, except for policies subject to transition periods.

Comments submitted to ISS may be published on its website, unless requested otherwise in the body of email submissions.

The proposals for U.S. companies address:

1.     Climate-Related Management and Shareholder Proposals.  In 2021, both shareholders and management have submitted Say on Climate proposals at companies that are considered “high impact" as well as at companies that would not be considered “high impact" from a greenhouse gas emissions (“GHG") emissions perspective.  ISS is proposing voting policies on both management and shareholder Say on Climate proposals that would document the frameworks it has developed for analyzing these proposals, as supplemented by feedback from ISS's 2021 Annual Benchmark Policy Survey and its Climate Policy Survey.  Under the proposed policies, ISS will vote case-by-case on both types of proposals, taking into consideration a list of factors set forth in each policy.

- For management proposals, ISS will vote case-by-case on management proposals asking shareholders to approve a company's climate transition action plan, “taking into account the completeness and rigor of the plan."  Information that ISS will consider would include:

+ the extent to which the company's climate-related disclosures align with Task Force on Climate-Related Financial Disclosure (“TCFD") recommendations and other market standards;

+ disclosure of the company's operational and supply chain GHG emissions (Scopes 1, 2 and 3)[1];

+ the completeness and rigor of the company's short-, medium- and long-term targets for reducing operational and supply chain GHG emissions in line with Paris Agreement goals (Scopes 1, 2 and 3 if relevant);

+ whether the company has sought and received third-party approval that its targets are science-based;

+ whether the company has made a Net Zero commitment for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;

+ whether the company discloses a commitment to report on the implementation of its plan in subsequent years;

+ whether the company's climate data has received third-party assurance;

+ disclosure of how the company's lobbying activities and capital expenditures align with company strategy;

+ whether there are specific industry decarbonization challenges; and

+ how the company's commitments, disclosure and performance compare to industry peers.

- For shareholder proposals requesting Say on Climate votes or other climate-related actions (such as a report outlining the company's GHG emissions levels and reduction targets), ISS will vote case-by-case taking into account information such as:

+ the completeness and rigor of the company's climate-related disclosures;

+ the company's actual GHG emissions performance;

+ whether the company has recently been the subject of significant violations, fines, litigation or controversy involving its GHG emissions; and

+ whether the proposal is unduly burdensome (in scope or timeframe) or overly prescriptive.

2.     Board Accountability on Climate at High-Impact Companies.  ISS is proposing a new policy that would apply to companies that are “significant GHG emitters" through their operations or value chain.  For 2022, these would be companies that Climate Action 100+ has identified as disproportionately responsible for GHG emissions.  Under the proposed policy, ISS will generally recommend “against" or “withhold" votes for the responsible incumbent director(s) or committee, or the full board, in cases where ISS determines a company is not taking minimum steps needed to understand, assess and mitigate climate change risks to the company and the larger economy.  The proposed policy states that expectations about the minimum steps that are sufficient “will increase over time."  For 2022, minimum steps are:

- Detailed disclosure of climate-related risks, such as according to the TCFD framework, including board governance measures, corporate strategy, risk management analyses, and metrics and targets; and

- “Appropriate GHG emissions reduction targets," which ISS considers “any well-defined GHG reduction targets."  Targets for Scope 3 emissions would not be required for 2022, but the proposed policy states that targets should cover at least a significant portion of the company's direct emissions.  ISS plans to provide additional climate-related data (beyond Scope 1 and 2) in its reports for informational purposes, for its clients that wish to take different approaches.

3.     Companies with Multi-Class Stock or Other Unequal Voting Rights.  ISS is proposing to begin issuing adverse voting recommendations with respect to directors at all U.S. companies with unequal voting rights.  If adopted, this change would be subject to a one-year transition period and would take effect in 2023.  Stock with “unequal voting rights" would include multi-class stock structures, as well as less common practices such as maintaining classes of stock that are not entitled to vote on the same ballot items or nominees, and loyalty shares (stock with time-phased voting rights).

ISS's policy since 2015 has been to recommend “against" or “withhold" votes for directors of newly-public companies with certain “poor" governance provisions that are not subject to a reasonable sunset, including multiple classes of stock with unequal voting rights, classified boards and supermajority voting requirements to amend the governing documents.  Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so were not subject to this policy.  As part of the 2021 Annual Benchmark Policy Survey, ISS sought feedback about whether to continue the practice of grandfathering.  According to ISS, investor feedback reflected substantial support for revisiting this practice, and investors ranked multi-class stock structures as the most problematic of the “poor" governance provisions.

ISS has specifically requested comment on whether this policy (if extended to all public companies) should provide for adverse voting recommendations on all nominees, which is the current approach for newly-public companies, or only some nominees (such as the nominating/governance committee or directors who are beneficiaries of the superior voting rights). 

ISS has also requested comment on whether to address classified boards and supermajority voting requirements to amend the governing documents as part of the 2022 policy changes.  It appears that ISS is considering whether to eliminate grandfathering for companies that were publicly traded before 2015 and that have one or both of these governance practices.  ISS is also seeking comment on how broadly it should apply negative voting recommendations—for example, whether it should recommend “against" or “withhold" votes for the nominating/governance committee chair for one “poor" governance practice and the full committee for both.

For the proposed transition year (2022), the policy would continue to apply to newly-public companies, but with a minor change.  Currently, these companies can avoid negative voting recommendations by reversing or removing the multi-class voting structure.  A “newly added reasonable sunset" would also be an option.  ISS considers a sunset period reasonable if it is no more than seven years.

4.     Board Diversity.  ISS is proposing to expand its policy on gender diversity to companies outside the S&P 1500 and Russell 3000 indices.  Under this policy, which has been in effect since February 2020 for S&P 1500 and Russell 3000 companies, ISS generally recommends “against" or “withhold" votes for the chair of a company's nominating/governance committee (or other directors, on a case-by-case basis) where there are no women on the board.  There is an exception to the policy for companies where there was at least one woman on the board at the prior annual meeting and the board makes a firm commitment to return to “a gender-diverse status" within a year. 

As a reminder for S&P 1500 and Russell 3000 companies, as part of its voting policy updates for 2021, ISS adopted a similar policy on racial/ethnic diversity with a one-year transition period.  That policy is now set to take effect in February 2022.  Accordingly, beginning in February 2022, ISS will generally recommend “against" or “withhold" votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) at S&P 1500 and Russell 3000 companies where the board “has no apparent racially or ethnically diverse members."  The policy includes an exception analogous to the one in the voting policy on gender diversity. 



[1]   Greenhouse gas emissions are categorized into three categories, or “scopes," by the most widely-used international accounting tool, the Greenhouse Gas Protocol.  Scope 1 covers direct emissions from sources owned or controlled by the company.  Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the company. Scope 3 is defined more broadly to include all other indirect emissions that occur both upstream and downstream of the company's operations, such as emissions from the company's supply chain, the company's non-energy inputs and the full life cycle of the company's products, including the electricity the company's customers may consume when using their products. Given this broad range, a company's Scope 3 emissions are often far larger than its Scope 1 and 2 emissions combined.


17 October 2021

A New Way of Seeing Value - Engine No. 1

Investors shouldn’t have to choose between a portfolio’s long-term financial return and its positive global impact. That’s why we developed the Engine No. 1 Total Value Framework which ties environmental, social, and governance impacts directly to financial value creation.

We believe a company’s performance is enhanced by the investments it makes in its employees, customers, communities, and the environment. We focus on identifying impacts that are crucial economic drivers—ones that shareholders are demanding, and the market will increasingly reward.

Our Total Value Framework is a data-driven approach that integrates non-traditional but financially material ESG data, methods, and systems into traditional analysis. We avoid common ESG scores and ranks in favor of quantifying corporate stakeholder impact in actual dollar amounts.

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21 August 2021

Shareholder Proposal Developments During the 2021 Proxy Season

by Gibson Dunn

I. Top Shareholder Proposal Takeaways from the 2021 Proxy Season

As discussed in further detail below, based on the results of the 2021 proxy season, there are several key takeaways to consider for the coming year:

- Shareholder proposal submissions rose significantly. After trending downwards since 2016, the number of proposals submitted increased significantly by 11% from 2020 to 802.

- The number of social and environmental proposals also significantly increased, collectively overtaking governance proposals as the most common. Social and environmental proposals increased notably, up 37% and 13%, respectively, from 2020.  In contrast, governance proposals remained steady in 2021 compared to 2020 and represented 36% of proposals submitted in 2021.  Executive compensation proposal submissions also declined in 2021, down 13% from the number of such proposals submitted in 2020.  The five most popular proposal topics in 2021, representing 46% of all shareholder proposal submissions, were (i) anti-discrimination and diversity, (ii) climate change, (iii) written consent, (iv) independent chair, and (v) special meetings.

- Overall no-action request success rates held steady, but the number of Staff response letters declined significantly. The number of no-action requests submitted to the Staff during the 2021 proxy season increased significantly, up 18% from 2020 and 19% from 2019.  The overall success rate for no-action requests held steady at 71%, driven primarily by procedural, ordinary business, and substantial implementation arguments.  However, the ongoing shift in the Staff’s practice away from providing written response letters to companies, preferring instead to note the Staff’s response to no-action requests in a brief chart format, resulted in significantly fewer written explanations, with the Staff providing response letters only 5% of the time, compared to 18% in 2020.

- Company success rates using a board analysis during this proxy season rose modestly, while inclusion of a board analysis generally remained infrequent. Fewer companies included a board analysis during this proxy season (down from 19 and 25 in 2020 and 2019, respectively, to 16 in 2021), representing only 18% of all ordinary business and economic relevance arguments in 2021.  However, those that included a board analysis had greater success in 2021 compared to 2020, with the Staff concurring with the exclusion of five proposals this year where the company provided a board analysis, compared to four proposals in 2020 and just one proposal in 2019.

- Withdrawals increased significantly. The overall percentage of proposals withdrawn increased significantly to the highest level in recent years.  Over 29% of shareholder proposals were withdrawn this season, compared to less than 15% in 2020.  This increase is largely attributable to the withdrawal rates of both social and environmental proposals, which rose markedly in 2021 compared to 2020 (increasing to 46% and 62%, respectively).

- Overall voting support increased, including average support for social and environmental proposals. Average support for all shareholder proposals voted on was 36.2% in 2021, up from the 31.3% average in 2020 and 32.8% average in 2019.  In 2021, environmental proposals overtook governance proposals to receive the highest average support at 42.3%, up from 29.2% in 2020. Support for social (non-environmental) proposals also increased significantly to 30.6%, up from 21.5% in 2020—driven primarily by a greater number of diversity-related proposals voted on with increased average levels of support.  Governance proposals received 40.2% support in 2021, up from 35.3% in 2020.  This year also saw a double-digit increase in the number of shareholder proposals that received majority support (74 in total, up from 50 in 2020), with an increasing number of such proposals focused on issues other than traditional governance topics.

- Fewer proponents submitted proposals despite the increase in the number of proposals. The number of shareholders submitting proposals declined this year, with approximately 276 proponents submitting proposals (compared to more than 300 in both 2020 and 2019).  Approximately 41% of proposals were submitted by individuals and 21% were submitted by the most active socially responsible investor proponents.  As in prior years, John Chevedden and his associates were the most frequent proponents (filing 31% of all proposals in 2021 and accounting for 75% of proposals submitted by individuals).  This year also saw the continued downward trend in five or more co-filers submitting proposals—down to 35 in 2021, from 54 in 2020 and 58 in 2019.

- Proponents continued to use exempt solicitations. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing 30% over the last three years.

- Amended Rule 14a-8 in EffectWith the amendments to Rule 14a-8 now in effect for meetings held after January 1, 2022, companies should revise their procedural reviews and update their deficiency notices accordingly.  However, it remains to be seen whether the new rules will lead to a decrease in proponent eligibility or result in an increase in proposals eligible for procedural or substantive exclusion, based on the new ownership and resubmission thresholds.  The SEC’s recently announced Reg Flex Agenda indicates that the SEC intends to revisit Rule 14a-8 as a new rulemaking item in the near term, putting into question the future of the September 2020 amendments.

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22 June 2021

Back to the Future: SEC Chair Announces Spring 2021 Reg Flex Agenda 

by Gibson Dunn

On June 11, 2021, the Securities and Exchange Commission released Chair Gary Gensler’s Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions (the “Reg Flex Agenda”).  This agenda reflects Chair Gensler’s willingness to reopen and perhaps even undo certain rulemakings that were completed in the last two years of former Chair Jay Clayton’s leadership and adopted by the Commission over the dissent of the Democrat Commissioners.  Shortly after the Reg Flex Agenda was issued, Republican Commissioners Hester Peirce and Elad Roisman issued a public statement criticizing Chair Gensler for “reopening large swathes of work that was just completed without new evidence to warrant reopening” and thereby, in their view, “undermin[ing] the Commission’s reputation as a steady regulatory hand.”[1] 

In this Client Alert, we summarize the key and noteworthy aspects of the Reg Flex Agenda that potentially impact public companies.  It should be noted that the items listed in the agenda reflect only the priorities of Chair Gensler and do not necessarily reflect the views and priorities of any other Commissioner.  In addition, the agenda does not contain much substantive information, only a brief “abstract” describing each rulemaking item.  Nevertheless, just the appearance of an item on the agenda can be informative.[2] 

As the Gensler Commission begins to appoint senior staff and to implement this agenda, it will be important for public companies and market participants to pay attention to the development and execution of Gensler’s agenda.  While no one expected the Gensler Commission to continue Clayton’s policy initiatives, at the same time, the extent to which Chair Gensler appears willing to undo or unwind the Clayton Commission’s previously adopted rulemakings is surprising, in part because, as a general matter, the SEC Staff tasked with doing the actual work of drafting the releases do not change.  What Gensler’s Reg Flex Agenda makes clear is that rulemakings that were adopted exclusively along party-line votes are particularly vulnerable to being “revisited,” and the roadmap for any future actions can be discerned from past dissenting statements the Democrat Commissioners issued when the rules were adopted.[3]

Proxy Reform

On June 1, 2021, Chair Gensler issued a public statement in which he directed the Division of Corporation Finance to revisit the Commission’s recent amendments regarding the application of the proxy rules to proxy advisory firms.[4]  These amendments, adopted in July 2020, codified the Commission’s view (which has also been the Staff’s longstanding view) that proxy voting advice generally constitutes a “solicitation” as defined in Exchange Act Rule 14a-1; added new conditions to the exemptions in Rule 14a-2(b)(9) from the proxy rules’ information and filing requirements that are used by proxy advisory firms; and amended the Note to Rule 14a-9 to include specific examples of material misstatements or omissions related to proxy voting advice.  These rule amendments took effect on November 2, 2020, and the proxy advisory firms are required to comply with the new conditions as of December 1, 2021.   

Consistent with Chair Gensler’s June 1 statement, the Reg Flex Agenda lists “Proxy Voting Advice” as a new item and indicates that it is at the “proposed rule stage” as opposed to the “prerule stage.”[5]  In addition, also on June 1, 2021, the Division announced that it would not enforce the Commission’s 2019 interpretation and guidance or the 2020 rule amendments during the period in which the Commission is considering further regulatory action in this area.[6]  This development does not affect the ability of private parties to file suit under the proxy rules, as amended; and the parties subject to the rule amendments technically must continue to comply with the provisions that have become effective.  

The agenda also includes “Rule 14a-8 Amendments” as a new item in the “proposed rule stage,” thereby putting into question whether the September 2020 amendments to the procedural requirements and resubmission thresholds in Rule 14a-8 will remain in effect by the time of the peak 2021/2022 shareholder proposal season.[7]  Although they became effective on January 4, 2021, the September 2020 amendments only apply to proposals submitted for an annual or special meeting to be held on or after January 1, 2022, and there is an even longer transition period for the new share ownership thresholds, which need not be satisfied for meetings held before January 1, 2023. 

The Reg Flex Agenda continues to list “Universal Proxy” as a “final rule stage” item, which is the last step in the rulemaking process in which the Commission responds to public comment on the proposed rule and makes appropriate revisions before publishing the final rule in the Federal Register.  Although the proposing release for this rulemaking was issued in October 2016 under Chair Mary Jo White’s leadership, it was first included in Chair Clayton’s Reg Flex Agenda in Spring 2020.   

Exempt Offerings

One of the last rulemaking projects completed by the Clayton Commission was amending the accredited investor definition in August 2020[8] and simplifying the Securities Act integration framework in November 2020, as part of a larger effort to harmonize the exempt offering framework.[9]   

Given the scope of these amendments, it was not generally expected that exempt offerings would be a priority for the Gensler Commission.  Nevertheless, the Reg Flex Agenda lists “Exempt Offerings” as a new “prerule stage” item and describes the rulemaking project with greater specificity as compared to other items, as follows: 

“The Division is considering recommending that the Commission seek public comment on ways to further update the Commission’s rules related to exempt offerings to more effectively promote investor protection, including updating the financial thresholds in the accredited investor definition, ensuring appropriate access to and enhancing the information available regarding Regulation D offerings, and amendments related to the integration framework for registered and exempt offerings.”

ESG Disclosure

As expected, the Reg Flex Agenda lists a number of items relating to Environmental/Social/Governance disclosures, all of which are “proposed rule stage” items:[10]

- “Climate Change Disclosure” – whether to “propose rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities”;[11]

- “Human Capital Management Disclosure” – whether to “propose rule amendments to enhance registrant disclosures regarding human capital management”;

- “Cybersecurity Risk Governance” – whether to “propose rule amendments to enhance issuer disclosures regarding cybersecurity risk governance”; and

- “Corporate Board Diversity” – whether to “propose rule amendments to enhance registrant disclosures about the diversity of board members and nominees.”

On March 15, 2021, then-Acting Chair Allison Herren Lee solicited public input on climate change disclosures by publishing 15 questions for comment.[12]  The informal comment period for this solicitation of input ended on June 13, 2021.

Rule 10b5-1 Plans and Share Buybacks

As early as 2007, then-Director of Enforcement Linda Chatman Thomsen gave a speech in which she expressed concern about possible abuse of Rule 10b5-1 plans, which were first authorized in 2000.[13]  She noted that “[r]ecent academic studies suggest that Rule 10b5-1 may be being abused.  The academic data shows that executives who trade within a 10b5-1 plan outperform their peers who trade outside of a plan by nearly 6%.”  As a result, “[t]his raises the possibility that plans are being abused essentially to facilitate trading on inside information.  So we’re looking…. If executives are in fact trading on inside information and using a plan for cover, the plan will provide no defense.”

Although the Commission has brought only a handful of enforcement actions involving the alleged abuse of a Rule 10b5-1 plan,[14] Chair Gensler recently stated that, “[i]n my view, these plans have led to real cracks.  Thus, I’ve asked staff to make recommendations for the Commission’s consideration on how we might freshen up Rule 10b5-1.”[15]  Gensler cited four areas of concern.  First, there is no cooling off period required before an insider can make his or her first trade under the plan.  He noted that cooling-off periods of four to six months have received bipartisan support.  Second, he noted that there is currently no limitation on when Rule 10b5-1 plans can be cancelled.  In his view, “canceling a plan may be as economically significant as carrying out an actual transaction.”  Third, there are no mandatory disclosure requirements regarding Rule 10b5-1 plans.  Fourth, there are no limits on the number of 10b5-1 plans that insiders can adopt.  Finally, Gensler noted that he is interested in Rule 10b5-1’s “intersection with share buybacks.”

Consistent with these statements, the Reg Flex Agenda lists “Rule 10b5-1” as a new “proposed rule stage” item regarding whether to “propose amendments to address concerns about the use of the affirmative defense provisions of Exchange Act Rule 10b5-1.”  The agenda also lists “Share Repurchases Disclosure Modernization” as a new “proposed rule stage” item regarding whether to “propose amendments to modernize disclosure of share repurchases, including Item 703 of Regulation S-K.”  Currently, share repurchase information (total number of shares purchased each month and the average price paid per share for that month) is required to be included in periodic reports, with footnote disclosure indicating whether purchases have been made pursuant to publicly announced plans or programs or outside of any such plans or programs. 

Beneficial Ownership Reporting and Swaps

The Reg Flex Agenda notes that the Division is “considering recommending that the Commission propose amendments to enhance market transparency, including disclosure related beneficial ownership or interests in security-based swaps.”  This new “proposed rule stage” item is likely related to the recent blow-up at Archegos Capital, a family office with extensive security-based swap and derivative positions that resulted in significant losses at several major investment banks.[16]  The magnitude of the losses emanating from this unregulated entity attracted much attention among legislators and the Commission, so it comes as no surprise that the Commission is considering whether to propose new rules seeking to enhance the transparency of significant holdings of swaps by market participants.  What is surprising is the absence of any mention of rulemaking that would potentially accelerate the current 10-calendar day deadline for filing initial Schedule 13D beneficial ownership reports – a generous filing deadline that has been of keen interest to public companies, legal practitioners, market participants and academics alike for decades.[17] 


Given the recent and significant volume of SPAC filings, it is not surprising that the Reg Flex Agenda lists, as a new “proposed rule stage” item, “Special Purpose Acquisition Companies.”  As the abstract indicates only that the Division is considering whether to recommend that the Commission propose rule amendments “related to special purpose acquisition companies,” it is not possible to discern the nature or objective of this rulemaking project based on the Reg Flex Agenda.

Dodd-Frank Items Added Back to the Reg Flex Agenda

The Fall 2020 Reg Flex Agenda, the last one issued under the Clayton Commission, did not include certain Dodd-Frank-mandated rulemakings; these have now been added back to the Spring 2021 Reg Flex Agenda.  Specifically, these are “Listing Standards for Recovery of Erroneously Awarded Compensation,” which is to implement Section 954 of Dodd-Frank and is now in the “proposed rule stage” (i.e., it is being reproposed); “Incentive-Based Compensation Arrangements,” which is to implement Section 956 of Dodd-Frank and is also being reproposed; and “Pay Versus Performance,” which is to implement Section 953(a) of Dodd-Frank and is listed (alarmingly, given the critical comments that were submitted on the initial rule proposal) as a “final rule stage” item.

Dropped from the Reg Flex Agenda

In July 2018, the Commission published a concept release on “Compensatory Securities Offerings and Sales,” which solicited comment on Securities Act Rule 701, which exempts from registration offers and sales of securities issued by non-reporting companies pursuant to compensatory arrangements, as well as on Form S-8, which is the registration statement for compensatory offerings by reporting companies.  Noting that “[s]ignificant evolution has taken place both in the types of compensatory offerings issuers make and the composition of the workforce since the Commission last substantively amended these regulation,” the Commission sought comment on “possible ways to modernize the exemption and the relationship between and Form S-8, consistent with investor attention.” 

This concept release then served as the basis for an item in the Fall 2020 Reg Flex Agenda, “Amendments to Rule 701/Form S-8.”  Also listed in the Fall 2020 Reg Flex Agenda was a new “proposed rule stage” item, “Temporary Rules to Include Certain ‘Platform Workers’ in Compensatory Offerings Under Rule 701 and Form S-8,” which Commissioners Peirce and Roisman described in their June 14, 2021 statement as “allow[ing] companies to compensate gig workers with equity.”  Both of these items have been dropped from the Spring 2021 Reg Flex Agenda.


Not unlike what is happening elsewhere in the Executive Branch, it now appears that part of the agenda of the Gensler Commission will be undoing the work of the Trump Administration.  In particular, in the last year of the Clayton Commission, many significant rulemakings were adopted over the dissent of the Democrat Commissioners.  Rereading now the “Statement on Departure of Chairman Jay Clayton” by Commissioners Allison Herren Lee and Caroline A. Crenshaw, their use of the possessive pronoun takes on more meaning:  “In addition to advancing his policy priorities, Chairman Clayton has led the agency through difficult times for the markets and our staff” (emphasis added).[18]


   [1]   Commissioner Hester M. Peirce and Commissioner Elad L. Roisman, “Moving Forward or Falling Back?  Statement on Chair Gensler’s Regulatory Agenda,” June 14, 2021, available at: https://www.sec.gov/news/public-statement/moving-forward-or-falling-back-statement-chair-genslers-regulatory-agenda

   [2]   It should also be noted that the requirement to provide a bi-annual reg flex agenda stems from the Regulatory Flexibility Act, which was enacted in 1980 to require agencies to consider the impact of their rules on small entities and to consider less burdensome alternatives.  A reg flex agenda provides notice to the public about what future rulemaking is under consideration and is not binding upon an agency in any way.

   [3]   In a June 17, 2021 newsletter, the Council of Institutional Investors (CII) stated, “The SEC on June 11 released a Spring 2021 rulemaking agenda that closely aligns with most of the priorities that CII set out for this year.”

   [4]   Chair Gary Gensler, “Statement on the application of the proxy rules to proxy voting advice,” June 1, 2021, available at:  https://www.sec.gov/news/public-statement/gensler-proxy-2021-06-01.  Chair Gensler’s statement also referred to the Commission’s guidance and interpretation issued in 2019 relating to proxy advisory firms, which have effectively been superseded by the 2020 rule amendments.  This guidance and interpretation addressed two questions:  first, whether proxy voting advice constitutes a “solicitation”; and second, whether proxy voting advice is subject to the antifraud rule, Exchange Act Rule 14a-9.  In October 2019, Institutional Shareholder Services, Inc. filed suit in the U.S. District Court for the District of Columbia to challenge the 2019 interpretation and guidance.  On June 1, 2021, the Commission filed an unopposed motion to hold the case in abeyance, noting that “[f]urther regulatory action on the items Chair Gensler has directed staff to consider revisiting could substantially narrow or moot some or all of ISS’s claims.” 

   [5]   A “prerule” means that the Commission will solicit public comment on whether or not, or how best, to initiate a rulemaking.  In contrast, a “proposed rule” means that the Commission is at the stage in which it will propose to add to or change its existing regulations and will solicit public comment on a rule proposal.

   [6]   Division of Corporation Finance, “Statement on Compliance with the Commission’s 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9,” June 1, 2021, available at:  https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01

   [7]   Release No. 34-89964, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Sept. 23, 2020, available at:  https://www.sec.gov/rules/final/2020/34-89964.pdf.  On June 15, 2021, a group of investors led by the Interfaith Center on Corporate Responsibility filed suit against the Commission in U.S. District Court in the District of Columbia to vacate these rule amendments.  Interfaith Center on Corporate Responsibility et al. v. SEC, U.S. District Court, District of Columbia, No. 21-01620 (June 15, 2021).

   [8]   Accredited Investor Definition, Release No. 33-10824 (Aug. 26, 2020) [85 FR 63726]

   [9]   Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Release No. 33-10884 (Nov. 2, 2020) [86 FR 3496].

  [10]   The first three items are new; the last is a continuation from the Fall 2020 Reg Flex Agenda.

  [11]   On June 16, 2021, the U.S. House of Representatives passed a bill, the Corporate Governance Improvement and Investor Protection Act, H.R. 1187, that would direct the Commission to issue rules within two years requiring every public company to disclose climate-specific metrics in financial statements.

  [12]   Acting Chair Allison Herren Lee, “Public Input Welcomed on Climate Change Disclosures,” March 15, 2021, available at:  https://www.sec.gov/news/public-statement/lee-climate-change-disclosures.

  [13]   Linda Chatman Thomsen, “Opening Remarks Before the 15th Annual NASPP Conference,” Oct. 10, 2007, available at: https://www.sec.gov/news/speech/2007/spch101007lct.htm.the

  [14]   See, for example, the SEC’s Enforcement action in 2010 against Angelo Mozilo, the former head of Countrywide Financial.  The SEC’s complaint alleged that, “During the course of this fraud, Mozilo engaged in insider trading in Countrywide’s securities. Mozilo established four sales plans pursuant to Rule 10b5-1 of the Securities Exchange Act in October, November, and December 2006 while in possession of material, non-public information concerning Countrywide’s increasing credit risk and the risk that the poor expected performance of Countrywide-originated loans would prevent Countrywide from continuing its business model of selling the majority of the loans it originated into the secondary mortgage market.”  

  [15]   Gary Gensler, “Prepared Remarks at the Meeting of SEC Investor Advisory Committee,” June 10, 2021, available at: https://www.sec.gov/news/public-statement/gensler-iac-2021-06-10?utm_medium=email&utm_source=govdelivery.

  [16]   See Alexis Goldstein, These Invisible Whales Could Sink the Economy, N.Y. Times, May 18, 2021, available here: https://www.nytimes.com/2021/05/18/opinion/archegos-bill-hwang-gary-gensler.html

  [17]   See, e.g., Wachtell, Lipton, Rosen & Katz rulemaking petition on Schedule 13D filing deadlines (Mar. 7, 2011) available here: https://www.sec.gov/rules/petitions/2011/petn4-624.pdf.

  [18]   Commissioners Allison Herren Lee and Caroline A. Crenshaw, “Statement on Departure of Chairman Jay Clayton,” Nov. 16, 2020, available at: https://www.sec.gov/news/public-statement/lee-crenshaw-statement-departure-chairman-jay-clayton



14 June 2021

European Commission Adopts New Standard Contractual Clauses for International Data Transfers and Data Processing Agreements

by Gibson Dunn

On 4 June 2021, the European Commission adopted two implementing decisions containing standard contractual clauses for the processing and transfer of personal data in compliance with the General Data Protection Regulation (“GDPR”).[1]  In particular, these decisions adopt:

- standard contractual clauses (“New SCCs”) for controllers and processors to provide appropriate safeguards regarding personal data transfers out of the European Economic Area (“EEA”) to third countries not recognised by the European Commission as ensuring an adequate level of protection for personal data (and which replace the standard contractual clauses adopted in 2001 and 2010 under the Data Protection Directive 95/46/EC, the “Old SCCs”);[2] and

- standard contractual clauses for the protection of personal data in the context of data processing agreements under Article 28 of the GDPR (“DPAs”) between controllers and processors (including within the European Economic Area, or “EEA”).[3]

These decisions aim to provide more complete contractual instruments for companies to execute prior to processing or transferring personal data from within the EEA, in line with the new requirements contained in the GDPR.  Unlike the Old SCCs, which only applied to controller-to-controller (“C2C”) and controller-to-processor (“C2P”) transfers outside of the EEA, the New SCCs include different modules that parties may select and complete depending on the circumstances of the transfer (C2C, C2P, P2P, and P2C).  Furthermore, the New SCCs applicable to transfers of personal data outside the EEA take into account the ruling of the Court of Justice of the EU (“CJEU”) of 16 July 2020 in the Schrems II judgment.

The New SCCs are of particular interest for European or U.S. companies and organisations, in particular those who could not rely on the Old SCCs to transfer data outside the EEA (because transfers did not occur in the C2C or C2P context addressed by the Old SCCs), or those companies and organisations whose transfers of personal data were compromised since the annulment of the EU-U.S. Privacy Shield. 

Although the new standard contractual clauses can be used as of 27 June 2021, the European Commission has put in place two grace periods for the New SCCs applicable to transfers of personal data outside of the EEA.  The first grace period allows controllers and processors to execute the Old SCCs until 27 September 2021.  The second grace period allows controllers and processors to rely on Old SCCs executed before 27 September 2021, until 27 December 2022.  As of the latter date, companies that relied on Old SCCs to transfer personal data outside of the EEA are expected to have fully transitioned to the New SCCs.

This Client Alert aims to help explain the potential uses of these new standard contractual clauses.

I.  Context

Under the GDPR, the European Commission has the power to adopt implementing acts, in particular: (i) creating standard contractual clauses for DPAs between controllers and processors and between processors and sub-processors (Article 28(7) of the GDPR), and (ii) creating standard contractual clauses as an appropriate safeguard for transfers of personal data to third countries (Article 46(2)(a) of the GDPR).

The implications of the adoption of these standard contractual clauses by the European Commission are different for both scenarios. 

On one side, the standard contractual clauses for DPAs aim to provide an optional set of clauses that controllers and processors may use to execute contracts in compliance with Article 28 of the GDPR.  However, any DPA is directly subject to Article 28 of the GDPR, and does not require the use of clauses approved by the European Commission or by EU supervisory authorities to be valid.  Furthermore, numerous supervisory authorities have published and issued similar sample or template DPAs to give guidance to controllers and processors.[4]  However, the standard contractual clauses for DPAs adopted by the European Commission may give additional comfort to companies and organisations that engage in cross-border processing of personal data and could not rely on any guidance offered by their (lead) supervisory authority. 

On the other hand, like the Old SCCs adopted under Directive 95/46/EC, the New SCCs adopted for transfers of personal data outside of the EEA have a greater importance for companies and organisations.  They may be considered to be de facto binding in most circumstances, as they are the most accessible and affordable framework from those available under the GDPR to transfer personal data to third countries.  The execution and application of New SCCs allows entities to transfer personal data to third countries without the direct and immediate intervention of or notification to any EU supervisory authority.[5] 

Since last year, the adoption of the New SCCs had become a pressing political and legal issue at the EU level.  On 16 July 2020, the CJEU adopted the Schrems II judgment, which invalidated the EU-U.S. Privacy Shield.  Numerous companies had relied on this framework to transfer personal data from the EEA to the U.S. and to provide assurances that this data would be protected after the transfer.  The CJEU’s ruling confirmed the validity of the Old SCCs adopted under Directive 95/46/EC (before the GDPR), but required    companies to verify, prior to any transfer of personal data pursuant to the SCCs, whether data subjects would be granted a level of protection in the receiving country essentially equivalent to that guaranteed  within the EU.  These requirements have been addressed and explained by the European Data Protection Board (“EDPB”) in two recommendations issued on 10 November 2020, and were discussed in a previous client alert.

Against this backdrop, the European Commission initiated the process for the adoption of these standard contractual clauses on 12 November 2020, when it adopted draft implementing decisions for the New SCCs and for standard contractual clauses for DPAs.  The decisions adopted on 4 June 2021 take into account the joint opinion of the EDPB and the European Data Protection Supervisor (“EDPS”), the feedback of stakeholders, and the opinion of Member States’ representatives.


[1]     See Commission Implementing Decision (EU) 2021/915 of 4 June 2021 on standard contractual clauses between controllers and processors under Article 28(7) of Regulation (EU) 2016/679 of the European Parliament and of the Council and Article 29(7) of Regulation (EU) 2018/1725 of the European Parliament and of the Council; and Commission Implementing Decision (EU) 2021/914 of 4 June 2021 on standard contractual clauses for the transfer of personal data to third countries pursuant to Regulation (EU) 2016/679 of the European Parliament and of the Council.

[2]     See Article 46(1) and (2)(c) of the GDPR.

[3]     See Artic le 28(7) of the GDPR.

[4]     See Article 28(8) of the GDPR, which also enabled EU supervisory authorities to adopt standard contractual clauses for DPAs.  See, for example, the French CNIL (https://www.cnil.fr/fr/sous-traitance-exemple-de-clauses); the Spanish AEPD (https://www.aepd.es/sites/default/files/2019-10/guia-directrices-contratos.pdf).  Denmark, Slovenia and Lithuania have also submitted to the European Data Protection Board (“EDPB”) draft standard contractual clauses for DPAs under Article 28 of the GDPR. 

[5]     Unlike other frameworks for the transfer of personal data outside the EEA, foreseen by Articles 46 and 47 of the GDPR, such as Binding Corporate Rules (“BCRs”), approved codes of conduct and certification mechanisms, or even ad hoc contractual clauses negotiated privately among controllers and/or processors.  All these mechanisms require or assume the intervention of a supervisory authority or a certified/approved third party to supervise and authorise the transfer of personal data outside of the EEA. 



24 February 2021

2020 Year-End Activism Update

by Gibson Dunn

This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion and below $100 billion (as of the last date of trading in 2020) during the second half of 2020. Announced shareholder activist activity increased relative to the second half of 2019. The number of public activist actions (35 vs. 24), activist investors taking actions (31 vs. 17) and companies targeted by such actions (33 vs. 23) each increased substantially. On a full-year basis, however, owing to the market disruption caused by the COVID-19 pandemic, 2020 represented a modest slowdown in activism versus 2019, as reflected in the number of public activist actions (63 vs. 75), activist investors taking actions (41 vs. 49) and companies targeted by such actions (55 vs. 64). During the period spanning July 1, 2020 to December 31, 2020, two of the 39 companies targeted by activists—CoreLogic, Inc. and Monmouth Real Estate Investment Corporation—were the subject of multiple campaigns. CoreLogic, Inc. was the subject of an activist campaign led by Cannae Holdings and Senator Investment Group; their efforts, in turn, ultimately drew the support of Pentwater Capital Management LP. In addition, certain activists launched multiple campaigns during the second half of 2020: Elliott Management, NorthStar Asset Management and Starboard Value. These three activists represented 23% of the total public activist actions that began during the second half of 2020.


*Study covers selected activist campaigns involving NYSE- and Nasdaq-traded companies with equity market capitalizations of greater than $1 billion as of December 31, 2020 (unless company is no longer listed).
**All data is derived from the data compiled from the campaigns studied for the 2020 Year-End Activism Update.

Additional statistical analyses may be found in the complete Activism Update linked below. 

The rationales for activist campaigns during the second half of 2020 changed in certain respects relative to the first half of 2020. Over both periods, board composition and business strategy represented leading rationales animating shareholder activism campaigns, representing 55% of rationales in the first half of 2020 and 49% of rationales in the second half of 2020. M&A (which includes advocacy for or against spin-offs, acquisitions and sales) took on increased importance; the frequency with which M&A animated activist campaigns rose from 9% in the first half of 2020 to 19% in the second half of 2020. At the opposite end of the spectrum, management changes, return of capital and control remained the most infrequently cited rationale for activist campaigns. (Note that the above-referenced percentages total over 100%, as certain activist campaigns had multiple rationales.) These themes are all broadly consistent with those observed in 2019. Proxy solicitation occurred in 14% of campaigns for the second half of 2020 and for 17% of campaigns in 2020 overall. These figures represent modest declines relative to 2019, in which proxy materials were filed in approximately 30% of activist campaigns for the entire year.

Read more


2 February 2021


Custodian settlement is ... marvellous - may i vote my lended shares?

GameStop Corp.  Short Interstest as % of Free Float

Gamestop Corp chart today

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Volkswagen chart <ordinary> October 2008

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The GameStop Short Squeeze – Potential Regulatory and Litigation Fall Out and Considerations

by Gibson Dunn

Over this past week, the stock market has experienced a turbulent and acutely volatile series of events related to the trading of a small group of public companies’ shares. With echoes of the 2010 “Flash Crash” and a mid-2020 surge in the share price of Hertz while Hertz remained mired in ongoing bankruptcy proceedings,[1] numerous companies’ stock prices have become unglued from their financials, valuations, and other fundamental analyses. Perhaps most (in)famously, the stock price of GameStop surged from a low of less than $20 in early January to a high of nearly $500 on January 28th —an increase of well over 1,000%—for no discernible reason beyond the efforts of thousands, or perhaps even millions, of internet message board users[2] to force a “short squeeze” targeting asset managers who shorted the stock in anticipation of GameStop’s declining stock price based on their analysis of the company’s fundamentals.[3] The ramifications have been widespread, ranging from the temporary crash of Reddit, the very website on which these efforts originated,[4] to popular trading platforms restricting customers’ ability to trade in particularly volatile securities,[5] and prominent financial institutions changing their investment approaches and abandoning certain short-sale trading positions.[6] Reactions have equally run the gamut, ranging from pundits who find these events “hilarious” or view this as a story of “an underdog against a mighty foe,” on the one hand, to those, on the other, who view the volatility as “a story of utter nihilism” and a “terrifying proof of concept” as to what can happen in financial markets when there is seemingly no connection between price and financial fundamentals.[7] For better or worse, many have analogized the increasingly powerful role of non-institutional investors to a “democratization of the markets.”[8]

While these events continue to unfold in real time, all three branches of the federal government have indicated an intent to address them. On January 28th, the Chairwoman of the House of Representatives’ Committee on Financial Services announced that it would hold hearings “with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors,”[9] while the incoming Chairman of the Senate Committee on Banking, Housing, and Urban Affairs similarly announced plans for forthcoming hearings “on the current state of the stock market.”[10] That very same day, the first litigation relating to these events was filed in the Southern District of New York, as an investor brought a putative class action lawsuit against the electronic trading platform Robinhood, alleging that limitations on trading implemented amidst this volatility had “deprived retail investors of the ability to invest in the open market” with intent “to manipulate the market for the benefit of . . . financial institutions.”[11] A dozen other lawsuits against Robinhood and others quickly followed in courts across the country.[12] In addition, the SEC announced that it was “actively monitoring the on-going market volatility in the options and equities markets” and working to “assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants,”[13] with news media reporting that the SEC is “eyeing a possible market manipulation case” analogizing traders’ online efforts to hype shares of particular companies to “a classic pump and dump” scheme.[14] At least two state attorneys general announced that they had initiated their own probes.[15]

I. Litigation Considerations

In light of the significant sums of money being made and lost, and the media blitz about the new reality and impact of retail investors taking collective action, it was almost inevitable that disputes would arise. Accordingly, it is no surprise that a wave of litigation is already finding its way to the courthouse.

What form is such litigation taking? Generally, the suits filed against Robinhood to date have been brought by certain of the company’s customers and have focused on Robinhood’s trading restrictions, sounding in alleged breaches of contract, breaches of the implied duty of good faith and fair dealing, negligence, and breaches of fiduciary duty. Other suits against Robinhood and various other parties have alleged antitrust claims under state law and both Sections 1 and 2 of the Sherman Act, and have asserted (without citing any evidence or making particularized allegations) improper coordination in prohibiting the purchase of certain securities to unreasonably restrain trade in the stock market, as well as exclusionary and anticompetitive conduct in prohibiting plaintiffs from effectuating trades.[16] In addition, claims have now also been brought under Rule 10b-5.[17]

Market manipulation can be prosecuted criminally by the United States Department of Justice, or pursued through civil litigation brought by agencies such as the SEC and/or private parties who have personally been harmed, including the aforementioned asset managers who have been subjected to a “short squeeze.” Many such claims may rely on Rule 10b-5, adopted by the SEC pursuant to the Securities Exchange Act of 1934, which broadly prohibits all schemes and artifices, including deception, in the trading of securities.[18] Rule 10b-5 is likely to be the most common basis of securities fraud causes of action when market participants are alleged to have perpetrated a fraud, deception, or other willful wrongdoing that results in the manipulation of a stock price—including in classic, or novel, “pump and dump” schemes—although there may be other potential causes of action available as well. For instance, Section 9(a)(2) of the Securities Exchange Act of 1934 has been litigated far less than Rule 10b-5, but it might also apply given its prohibition on “effect[ing] . . . a series of transaction in any security . . . creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.”[19]

Of course, the application of Rule 10b-5, Section 9(a)(2), or any other cause of action to a particular set of transactions, and whether such claims can be economically litigated against those engaging in relatively small transactions, including through the novel use of a defendant class action,[20] are questions that are necessarily fact-specific and cannot be addressed in the abstract. Whether an asset manager would file suit against a group of traders circulating materially, false and misleading information, for example, for purposes of artificially inflating the stock price is uncertain given the commercial reality that many of the traders do not have sufficient assets to cover the losses, that litigation is a two-way street and would require a plaintiff asset manager to open up their internal analyses and communications to discovery, and it might create optics issues for a resourceful asset manager bringing action against a group of retail investors. Accordingly, the more likely prosecutor of such market manipulation is the government.

Another type of claim regulators may investigate in these circumstances is open-market manipulation. Open-market manipulation is a more ambiguous and amorphous violation of the securities laws that is effectuated solely through facially legitimate trading.[21] A typical example of prosecutable open market manipulation is known as “marking” or “banging the close,” which occurs when a trader with the intent to defraud purchases a large quantity of shares at or near the close of the trading day. This can boost the trader’s portfolio value, or allow the trader to avoid losing out on an option position. A related form of manipulation called “painting the tape” occurs when a trader with the intent to defraud purchases or sells shares throughout the day to increase the trading volume in an effort to attract more investment in the stock. Such transactions may appear legitimate on their face because they are simply open market trades, but if their intent and effect is to artificially drive up a stock’s closing price for the purposes of defrauding others, they may be actionable under Rule 10b-5.[22] While difficult to prove and heavily dependent on the facts and circumstances, claiming open market manipulation is not without precedent. Two examples are illustrative.

First, Markowski v. SEC involved executives of Global America, Inc., an underwriter, who challenged an SEC order sustaining disciplinary action taken against them by the National Association of Securities Dealers. Global America had underwritten an IPO of a security, after which it accounted for nearly all of the open market purchases and sales in the first six months of that security’s trading. The SEC alleged that Global America’s trading activity kept the stock price artificially inflated, until Global America stopped trading in the stock and its price cratered. Although all of Global America’s transactions were real trades at the market price and did not involve any misrepresentations, the SEC alleged that the effect and intent of Global America’s trading was nevertheless to boost the share price of the security in question. In December 2001, the D.C. Circuit affirmed Rule 10b-5 liability for the Global America executives involved in this stock market manipulation.[23]

United States v. Mulhern provides another example of a claim of open market manipulation that satisfied the elements (though in this instance the government failed to meet its burden of proof). Mulhern involved famed financier Ivan Boesky, who acquired 4.9% of Gulf & Western Industries’ common stock. The government’s unproven allegations were as follows: Boesky first made a failed attempt at a leveraged buyout, after which he subsequently offered to sell his stake back to Gulf & Western at an above-market price. When Gulf & Western rejected that proposal, Boesky next allegedly caused his associate John Mulhern, the chief trader and general partner of a broker-dealer, to make a series of purchases of additional Gulf & Western stock that soon pushed its share price up to Boesky’s desired level. With the stock price rising, Gulf & Western eventually agreed to the earlier proposal and purchased from Boesky his entire 4.9% stake. In addition to losing Mulhern approximately $65,000 on his Gulf & Western investment when the price subsequently went back down, the U.S. Attorney for the Southern District of New York criminally charged Mulhern with multiple counts of market manipulation under Rule 10b-5. The Second Circuit subsequently overturned Mulhern’s conviction on four counts of market manipulation. Crucially, however, the Second Circuit did not reject the legal theories at the heart of the prosecution, but rather determined that the government had failed to satisfy its burden of proof.[24]

II. Other Options to Maintain Market Integrity

Aside from litigation, both the private sector and regulators have a number of options to preserve the integrity of financial markets.

a. Regulatory Intervention

The SEC and other regulators have a wide variety of tools at their disposal to “protect[ ] investors, maintain[ ] fair, orderly and efficient markets, and facilitat[e] capital formation.”[25] Although it has yet to invoke this power, for example, the SEC may suspend trading in a security for up to ten days, either outright or with respect to particular types of trading.[26] Notably, during the 2008 financial crisis the SEC suspended short selling to protect the integrity of the market.[27] Self-regulatory organizations (“SRO”), such as stock exchanges, can also halt trading in circumstances where there is a significant imbalance in the volume of buy and sell orders in a security.[28]

Neither the SEC nor the various SROs handling GameStop and the other securities with similar patterns of extremely volatile trading divorced from their financial fundamentals have chosen to exercise this authority during the current short squeeze event to-date. Robinhood, a trading platform used by retail investors, did choose to temporarily limit certain types of trading in approximately 50 different securities—including GameStop—as a risk management decision that Robinhood asserted was necessary to protect the platform and its clearinghouses, and to ensure its compliance with various regulatory requirements.[29]

b. Practical Considerations for Hedge Funds and Other Financial Institutions

Short of litigating claims based on market manipulation, market participants might also consider other approaches to these tumultuous times.

As an initial matter, recent market events have underscored the importance of securities law compliance and monitoring. Hedge funds and other financial institutions could consider expanding their current compliance programs, if needed, to include monitoring of message boards and social media postings to determine whether other market participants are complying with the securities laws. Such monitoring could allow hedge funds and others to more proactively anticipate and respond to market disrupting events. To the extent that they have not already done so, for instance, hedge funds and other financial institutions could create a process for swiftly compiling and analyzing online chatter in order to remain alert as to emerging efforts to coordinate investment activities.

When it comes to information circulated online, hedge funds and others might also consider proactively engaging with retail investors and the media by correcting any misinformation being disseminated online. Specifically, institutional investors might consider identifying and correcting false information discovered in the marketplace through counsel and external investigators. Financial institutions could also collaborate with public relations consultants to engage online and traditional media platforms to assist in correcting emerging inaccuracies before they attain undue momentum.

Hedge funds and others should also consider proactively engaging with online platforms to request that false, misleading and/or reckless allegations concerning a company or its personnel be taken down pursuant to the hosting companies’ policies and processes. “Take Down” requests might not be feasible on the grand scale currently seen on Reddit message boards, however, and targeting particularly problematic posts may be more effective. For social media platforms hosting stock trading discussions, such as Reddit and Yahoo!, it is important to note that Section 230 of the Communications Decency Act of 1996 provides them with broad protection in connection with content posted by third-parties on their platforms. Accordingly, the hosting entities themselves generally cannot be held liable for what others say on their platform.[30] Market participants can nevertheless work with counsel to familiarize themselves with the user policies of social media companies and online message boards in order to flag instances of misconduct that may violate the hosting platform’s policies. On the evening of January 27th, for example, online platform Discord briefly removed a “WallStreetBets” thread for violating its guidelines on hate speech and spreading misinformation.[31] Notably, the “WallStreetBets” forum on Reddit has rules that prohibit posts that “contain[ ] false or misleading information . . . made for the purpose of manipulating the market for a security” and provide that “[a]ny activity of this sort is against the securities laws and will not be tolerated on this forum.”[32] Efforts to pinpoint specific violations can thus aid online platforms in the expedient removal of false and misleading posts.

c. Practical Considerations for Issuers of Securities

As markets are liberalized and retail investors can more readily access equities markets and coordinate efforts therein to create massive volatility, issuers should be aware of their strategic options if they become a target of a similar GameStop-style campaign. As with all aspects of a business, the first step in addressing any potential harm is monitoring and becoming aware of the situation before it gets out of control.

Rising share prices seemingly present opportunities for issuers that should be carefully considered with legal counsel and other advisors. For instance, those with shelf offerings or at-the-market equity programs in place may attempt to capitalize on their good fortune. To provide an example, AMC Entertainment, another issuer recently impacted by significant retail investor activity, completed a pre-planned at-the-market equity program by selling 63.3 million shares after seeing its stock price increase significantly in the first weeks of January, allowing it to raise $304.8 million.[33] An issuer finding itself in the strange situation of not believing in the value of its own share price nevertheless must be careful to avoid making any material misstatements or omissions supporting such unjustified enthusiasm, especially when considering making any form of stock issuance. For example, an issuer might consider if it is appropriate under the circumstances to make a public statement explaining that there is no material information to account for the rising share price. Companies issuing securities based on a price they believe to be inflated may well run the risk of regulatory inquiries, and/or securities litigation if and when the share price eventually declines. And, as always, issuers and employees of issuers must be cautious to avoid even the appearance of trading on inside information when dealing in the company’s securities.

Of course, instead of the next volatility event of this nature driving stock prices up, it is just as likely an issuer could be targeted with a run of short-selling that drives the stock price down. In this case, issuers should be ready to engage in the “take down” efforts, discussed above. Issuers might also consider engaging, as appropriate under the circumstances, legal counsel, crisis management experts, accountants, and a public relations team to ensure they are correcting any false information and assuring the public of the issuers fundamental health. Issuers in such a situation might also avail themselves of one of the author’s prior writings on this very topic.[34]

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By developing sound crisis management plans and executing them with the right mix of offensive and defensive strategies, hedge funds, financial institutions and issuers can weather these turbulent times. And as always, Gibson Dunn remains available to help its clients in doing so.


   [1]   See, e.g., Theron Mohamed, Day Traders Are Piling into Hertz, JCPenney, and Other Bankruptcy Stocks Despite Massive Risks, Business Insider (Jun 11, 2020), https://www.businessinsider.com/robinhood-traders-bet-hertz-bankruptcy-stocks-despite-huge-risks-2020-6.

   [2]   Some have analogized the current activity of message board users to “idea dinners” or gatherings of hedge fund managers to discuss stocks, markets, and trends. Such dinners and other idea exchanges were previously investigated by the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice. In 2010, for example, the Department of Justice investigated a number of hedge funds for allegedly colluding in betting against the Euro after one such idea dinner. No charges were ever brought.

   [3]   See, e.g., Ian Sherr, Reddit’s GameStop Stock Battles with Wall Street are Turning Into a War, CNET (Jan. 28, 2021), https://www.cnet.com/personal-finance/reddits-gamestop-stock-battles-with-wall-street-are-turning-into-a-war; Yun Li, GameStop Mania Explained: How the Reddit Retail Trading Crowd Ran Over Wall Street Pros, CNBC (Jan. 27, 2021), https://www.cnbc.com/2021/01/27/gamestop-mania-explained-how-the-reddit-retail-trading-crowd-ran-over-wall-street-pros.html.

   [4]   Katie Canales, Reddit Says It’s Down Amid a Stock-Market Frenzy Caused by Subredditors and Skyrocketing GameStop Shares, Business Insider (Jan. 27, 2021), https://www.businessinsider.com/reddit-is-down-outage-amid-gamestop-stock-market-interest-2021-1.

   [5]   Elana Dure, Robinhood, Interactive Brokers Latest to Restrict Trading of GameStop and Others, Investopedia (Jan. 28, 2021), https://www.investopedia.com/robinhood-latest-broker-to-restrict-trading-of-gamestop-and-others-5100879.

   [6]   See, e.g., Yun Li, Melvin Capital, Hedge Fund Targeted by Reddit Board, Closes out of GameStop Short Position (Jan. 27, 2021), https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html; Maggie Fitzgerald, Citron Research, Short Seller Caught Up in GameStop Squeeze, Pivoting to Finding Long Opportunities (Jan. 29, 2021), https://www.cnbc.com/2021/01/29/citron-research-short-seller-caught-up-in-gamestop-squeeze-pivoting-to-finding-long-opportunities.html.

   [7]   Compare David Dayen, The GameStop Craziness Pulls Back the Curtain on the Stock Market, The American Prospect (Jan. 28, 2021), https://prospect.org/power/gamestop-craziness-pulls-back-curtain-on-stock-market/, and Sarah Jones, The Final Boss is Capitalism, New York Magazine (Jan. 29, 2021), https://nymag.com/intelligencer/2021/01/gamestop-saga-shows-the-final-boss-is-capitalism.html; with Matt Levine, The GameStop Game Never Stops, Bloomberg (Jan. 25, 2021), https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops.

   [8]   Zachary Karabell, How the GameStop Trading Surge Will Transform Wall Street, Time (Jan. 28, 2021), https://time.com/5934285/gamestop-trading-wall-street/; see also, e.g., John Detrixhe, The Dark Side of the Democratization of Trading, Quartz (Jan. 29, 2021), https://news.yahoo.com/dark-side-democratization-trading-161358522.html.

   [9]   Following Recent Market Instability, Waters Announces Hearing on Short Selling, Online Trading Platforms (Jan. 28, 2021), here.

[10]   Brown: Wall Street Only Cares About Rules When Hedge Funds Get Hurt (Jan. 28, 2021), https://www.brown.senate.gov/newsroom/press/release/brown-wall-street-hedge-funds.

[11]   Nelson v. Robinhood Financial LLC, No. 21 Civ. 777, Dkt. 1 (S.D.N.Y. Jan. 28, 2021).

[12]   See, e.g., Courtney v. Robinhood Financial LLC et al., 21 Civ. 60220 (S.D. Fla.); Daniels v. Robinhood Financial, LLC et al., No. 21 Civ. 290 (D. Colo.); Gatz v. Robinhood Financial, LLC, No. 12 Civ. 490 (N.D. Ill.); Kayali v. Robinhood Financial, LLC et al., No. 21 Civ. 510 (E.D. Ill.); Lavin v. Robinhood Financial, LLC et al., No. 21 Civ. 115 (E.D. Va.); Ross v. Robinhood Financial LLC et al., No. 21 Civ. 292 (S.D. Tex.); Schaff v. Robinhood Markets, Inc. et al., No. 21 Civ. 216 (M.D. Fla.); Simpson v. Robinhood Financial, LLC, No. 21 Civ. 207 (N.D. Tex.); Weig v. Robinhood Financial, LLC et al., No. 21 Civ. 693 (N.D. Cal.); Ziegler v. Robinhood Financial LLC et al., No. 21 Civ. 123 (D. Conn.); Zybura v. Robinhood Financial, LLC et al., No. 21 Civ. 1348 (D.N.J.).

[13]   Dean Seal, White House, SEC ‘Monitoring’ Volatile GameStop Stock, Law360 (Jan. 27, 2021), https://www.law360.com/media/articles/1349195/white-house-sec-monitoring-volatile-gamestop-stock?nl_pk=ef15795b-2462-46f9-bdad-117fcfcc6a0f&utm_source=newsletter&utm_medium=email&utm_campaign=media.

[14]   Charles Gasparino, Sic the SEC? Not so Fast – Case Near Impossible to Prove, N.Y. Post (Jan. 28, 2021), https://nypost.com/2021/01/28/will-the-sec-probe-the-gamestop-stock-mania-not-so-fast/. In a “pump and dump” scheme an investor spreads false or misleading information about a company in an attempt to induce other market participants to buy stock in that company. Once the stock price has been “pumped” up by the increased, but unwarranted, market enthusiasm, the investor will then “dump” their shares at a profit before the market accounts for the false information and returns the stock to a more appropriate baseline price.

[15]   The Texas Attorney General issued civil investigative demands. See Diane Bartz, Texas Attorney General Probes GameStop Trade Curbs from Robinhood, Others (Jan. 29, 2021), https://www.reuters.com/article/us-retail-trading-robinhood-texas/texas-attorney-general-probes-gamestop-trade-curbs-from-robinhood-others-idUSKBN29Y2US. The New York Attorney announced an inquiry. See Ben Feuerherd, NY AG Letitia James ‘Reviewing’ Robinhood Over GameStop Trade Restrictions (Jan. 28, 2021), https://nypost.com/2021/01/28/ny-ag-letitia-james-reviewing-robinhood-over-gamestop-trading/.

[16]   See Kayali v. Robinhood Financial, LLC et al., No. 21 Civ. 510 (N.D. Ill.); Lavin v. Robinhood Financial, LLC et al., No. 21 Civ. 115 (E.D. Va.); Ross v. Robinhood Financial LLC et al., No. 21 Civ. 292 (S.D. Tex.).

[17]   See Daniels v. Robinhood Financial, LLC et al., No. 21 Civ. 290 (D. Colo.); Gatz v. Robinhood Financial, LLC, No. 12 Civ. 490 (N.D. Ill.).

[18]   17 C.F.R. § 240.10b-5(a)-(c).

[19]   15 U.S.C. § 78i(a)(2).

[20]   See Fed. R. Civ. P. 23(a) (“One or more members of a class may sue or be sued as representative parties on behalf of all members . . . .”) (emphasis added).

[21]   For an in-depth analysis of open market manipulation see Gina-Gail S. Fletcher, Legitimate Yet Manipulative: The Conundrum of Open-Market Manipulation, 68 DUKE L.J. 479 (2018).

[22]   See e.g., SEC v. Masri, 523 F. Supp. 2d 361 (S.D.N.Y. Nov. 20, 2007); CFTC v. Amaranth Advisors , L.L.C., 554 F. Supp. 2d 523 (S.D.N.Y. May 21, 2008).

[23]   Markowski v. SEC, 274 F.3d 525 (D.C. Cir. 2001).

[24]   United States v. Mulheren, 938 F.2d 364 (2d Cir. 1991).

[25]   What We Do, SEC, https://www.sec.gov/about/what-we-do.

[26]   Investor Bulletin: Trading Suspensions, U.S. Securities and Exchange Commission (Dec. 3, 2018), https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/investor-5.

[27]   SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets, U.S. Securities and Exchange Commission (Sept. 19, 2008), https://www.sec.gov/news/press/2008/2008-211.htm.

[28]   Trading Halts and Delays, U.S. Securities and Exchange Commission (July 3, 2010), https://www.sec.gov/fast-answers/answerstradinghalthtm.html.

[29]   See, e.g., Kate Kelly, Matt Phillips, and Gillian Friedman, Trading Curbs Reverse GameStop Rally, Angering Upstart Traders, NYTimes (Jan. 28, 2021), here; Catherine Ross, Robinhood CEO on Trading Halts: ‘We Made the Correct Decision,’ Yahoo! Finance (Jan. 28, 2021), https://finance.yahoo.com/news/robinhood-ceo-trading-halts-made-001505664.html; Maggie Fitzgerald, Robinhood is Still Severely Limiting Trading, Customers Can Only Buy One Share of GameStop, CNBC (Jan. 29, 2021), https://www.cnbc.com/2021/01/29/robinhood-is-still-severely-limiting-trading-gamestop-holders-can-only-buy-one-additional-share.html; Nicholas Jasinski, Why Did Robinhood Stop GameStop Trading? Everything to Know., Barron’s (Jan. 29, 2021), https://www.barrons.com/articles/why-did-robinhood-stop-gamestop-trading-51611967696.

[30]   See 47 U.S.C. § 230 (“No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”).

[31]   Connor Smith, Reddit’s WallStreetBets Briefly Goes Private After Discord Shuts Down Server, Barron’s (Jan. 27, 2021), https://www.barrons.com/articles/reddits-wallstbets-goes-private-shortly-after-discord-shuts-down-server-51611792059.

[32]   r/wallstreetsbets/rules, Reddit (last accessed January 31, 2021), https://www.reddit.com/r/wallstreetbets/about/rules.

[33]   See AMC Completes At the Market Equity Program, Yahoo! Finance (Jan. 27, 2021), https://finance.yahoo.com/news/amc-completes-market-equity-program-170800262.html.

[34]   See Avi Weitzman, Barry Goldsmith & Jonathan Seibald, What to Know About Short-Seller Risks During Pandemic, Law360 (June 3, 2020), https://www.law360.com/articles/1278319.



7 December 2020

Nasdaq Proposes New Board Diversity Rules

On December 1, 2020, The Nasdaq Stock Market LLC (“Nasdaq”) announced that it filed with the U.S. Securities and Exchange Commission (the “SEC”) a proposal to advance board diversity and enhance transparency of board diversity statistics through new listing requirements. This client alert provides a summary of the proposed rules and the rationale for the proposals. In summary, if approved by the SEC, the proposed rules would require certain Nasdaq-listed companies to: (A) annually disclose diversity statistics regarding their directors’ voluntary self-identified characteristics in substantially the format proposed by Nasdaq for the current year and (after the first year of disclosure) the immediately prior year; and (B) include on their boards of directors at least two “Diverse” directors (as defined in the rules) or publicly disclose why their boards do not include such “Diverse” directors.

Nasdaq’s Annual Board Diversity Disclosure Proposal

The proposed rules would require Nasdaq-listed companies, other than “Exempt Entities” (as defined below), to provide statistical information about each director’s self-identified gender, race, and self-identification as LGBTQ+ in substantially the format proposed by Nasdaq under new proposed Rule 5606 (the “Board Diversity Matrix”), which is reproduced as Exhibit A below and is also available at the Nasdaq Listing Center here. Following the first year of disclosure, companies would be required to disclose the current year and immediately prior year diversity statistics using the Board Diversity Matrix or in a substantially similar format.

This statistical information disclosure would be required to be provided (A) in the company’s proxy statement or information statement for its annual meeting of shareholders, or (B) on the company’s website. If the company provides such disclosure on its website, the company must also submit such disclosure and include a URL link to the disclosure through the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholders meeting.

The proposed diversity disclosure requirement is limited to the board of directors of the company, and does not require disclosure of diversity metrics for management and staff. Foreign Issuers may elect to satisfy the board composition disclosure requirement through an alternative disclosure matrix template. (See Nasdaq Identification Number 1761).

Include Diverse Directors or Explain

The proposed listing rule would require most Nasdaq-listed companies, other than “Exempt Entities” (as defined below), to:

(A) have at least two members of its board of directors who are “Diverse,” which includes:

(1) at least one director who self-identifies her gender as female, without regard to the individual’s designated sex at birth (“Female”); and

(2) at least one director who self-identifies as one or more of the following:

(i) Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities (“Underrepresented Minority”); or

(ii) as lesbian, gay, bisexual, transgender or a member of the queer community (“LGBTQ+”); or

(B) explain why the company does not have at least two directors on its board who self-identify as “Diverse.”

For the purposes of the proposed rule described above, the term “Diverse” means an individual who self-identifies in one or more of the following categories defined above: Female, Underrepresented Minority or LGBTQ+.

Foreign Issuers (including Foreign Private Issuers) and Smaller Reporting Companies would have more flexibility to satisfy the requirement for two Diverse directors by having two Female directors. In the case of a Foreign Issuer, in lieu of the definition above, “Diverse” means an individual who self-identifies as one or more of the following: Female, LGBTQ+, or an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction.

While Nasdaq’s definition of a “Diverse” director is substantially aligned with California’s Board Gender Diversity Mandate, there are some key differences, which are highlighted by Nasdaq here. Also, according to Nasdaq, the proposed rule “would exclude emeritus directors, retired directors and members of an advisory board. The diversity requirements of the proposed rule would only be satisfied by Diverse directors actually sitting on the board of directors of the company.” (See Nasdaq Identification Number 1770).

The definition of “Underrepresented Minority” is consistent with the categories reported to the U.S. Equal Employment Opportunity Commission through the Employer Information Report EEO-1 Form.

Exempt Entities

The following entities are exempt from the requirements described under “Nasdaq’s Annual Board Diversity Disclosure Proposal” and “Nasdaq’s Board Diversity Rule Proposal” above (the “Exempt Entities”):

- acquisition companies listed under IM-5101-2 (Listing of Companies Whose Business Plan is to Complete One or More Acquisitions);

- asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1) (Asset-backed Issuers and Other Passive Issuers));

- cooperatives (as set forth in Rule 5615(a)(2) (Cooperatives));

- limited partnerships (as set forth in Rule 5615(a)(4) (Limited Partnerships));

- management investment companies (as set forth in Rule 5615(a)(5) (Management Investment Companies));

- issuers of nonvoting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6) (Issuers of Non-Voting Preferred Securities, Debt Securities and Derivative Securities)); and

- issuers of securities listed under the Rule 5700 Series (Other Securities).

Compliance Period

Annual Board Diversity Disclosure Proposal

Each Nasdaq-listed company would have one calendar year from the date the SEC approves the Nasdaq rules (the “Approval Date”) to comply with the board diversity disclosure requirement. Each company newly listing on Nasdaq, including any Special Purpose Acquisition Company (“SPAC”) listed or listing in connection with a business combination under Nasdaq’s IM-5101-2, would be require to comply with the board diversity requirement within one year of listing, subject to the conditions further discussed under “Phase-in Period” below.

Board Diversity Rule Proposal

Each Nasdaq-listed company would have two calendar years from the Approval Date to comply with the requirements described under “Nasdaq’s Board Diversity Rule Proposal” above. Further, Nasdaq proposes for each company to have, or explain why it does not have, two diverse directors no later than: (i) four calendar years after the Approval Date, for companies listed on the Nasdaq Global Select or Nasdaq Global Market; or (ii) five calendar years after the Approval Date, for companies listed on the Nasdaq Capital Market. A company listing after the Approval Date, but prior to the end of the periods set forth in this paragraph, must satisfy the Diverse directors requirements by the latter of the periods set forth in this paragraph or one year from the date of listing. A SPAC “would be exempt from the proposed board diversity and disclosure rules until one year following the completion of [the SPAC’s] business combination.” (See Nasdaq Identification Number 1762).

Phase-in Period

Any company newly listing on Nasdaq will be permitted one year from the date of listing on Nasdaq to satisfy the requirements of Diverse directors, as long as such company was not previously subject to a substantially similar requirement of another national securities exchange, including through an initial public offering, direct listing, transfer from the over-the-counter market or another exchange, or through a merger with an acquisition company listed under Nasdaq’s IM-5101-2. This phase-in period will apply after the end of the transition periods described under “Compliance Period” above.

Cure Period

If a company does not have at least two Diverse directors and fails to provide the required disclosure, the Nasdaq’s Listing Qualifications Department will notify the company that it has until the later of the company’s next annual shareholders meeting or 180 days from the event that caused the deficiency to cure the deficiency.


The proposed requirements are an extension of Nasdaq’s (and other securities exchanges’) use of the listing rules to improve listed companies’ corporate governance (e.g., the requirement of independent committees). The proposed disclosure requirements build on the SEC Division of Corporation Finance’s Compliance and Disclosure Interpretations 116.11 and 133.13, issued on February 6, 2019, regarding director and director nominee diversity disclosure under Items 401 and 407 of Regulation S-K, and reflect similar movement in the market (e.g., Goldman Sachs’s new standard requirement to have at least one diverse board member on companies it helps take public in 2020 and two in 2021). However, according to the New York Times, “[o]ver the past six months, Nasdaq found that more than 75 percent of its listed companies did not meet its proposed diversity requirements.”

Nasdaq’s proposal cited studies about the positive correlation of diversity and shareholder value, investor protection, decision making and monitoring management. In connection with the proposed rules, Nasdaq also announced that it “conducted an internal study of the current state of board diversity among Nasdaq-listed companies based on public disclosures, and found that while some companies already have made laudable progress in diversifying their boardrooms, the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.”

Additional Information

Nasdaq has provided additional information through a summary and Frequently Asked Questions available on Nasdaq’s Reference Library Advanced Search, in Identification Numbers 1745 through 1777.

Nasdaq also announced a partnership with Equilar, Inc., a provider of corporate leadership data solutions, to aid Nasdaq-listed companies with board composition planning challenges and allowing Nasdaq-listed companies, through the Equilar BoardEdge platform, to have access to diverse board candidates to amplify director search efforts.

Next Steps

The proposed rules will be published in the Federal Register and subject to public comment. Comments to the proposed rules should be submitted to the SEC within 21 days of their publication in the Federal Register.

The approval period may take as little as 30 calendar days and as long as 240 calendar days from the date of publication of the proposed rules in the Federal Register (as described in further detail below). If approved by the SEC, the “Compliance Period” discussed above would begin.

- Section 19(b)(2)(C)(iii) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), provides that the SEC may not approve a proposed rule change earlier than 30 days after the date of publication of the proposed rules in the Federal Register, unless the SEC finds good cause for so doing and publishes the reason for the finding.

- Under Section 19(b)(2)(A)(i) of the Exchange Act, within 45 days of the date of publication of the proposed rules in the Federal Register, the SEC may approve or disapprove the proposed rule change by order or, under Section 19(b)(2)(A)(ii) of the Exchange Act, extend the period by not more than an additional 45 days (to a total of 90 days).

- However, if the SEC does not approve or disapprove the proposed rule change, Section 19(b)(2)(B)(i)(II) of the Exchange Act allows the SEC the opportunity for hearings to be concluded no later than 180 days after the notice of the proposed rule change (which can be extended by not more than 60 days (to a total of 240 days), pursuant to Section under Section 19(b)(2)(B)(ii)(II) of the Exchange Act).


Exhibit A

Board Disclosure Format

Board Diversity Matrix (As of [DATE])
Board Size:
Total Number of Directors #
Gender: Male Female Non-Binary Gender Undisclosed
Number of directors based on gender identity # # # #
Number of directors who identify in any of the categories below:
African American or Black # # # #
Alaskan Native or American Indian # # # #
Asian # # # #
Hispanic or Latinx # # # #
Native Hawaiian or Pacific Islander # # # #
White # # # #
Two or More Races or Ethnicities # # # #
Undisclosed #


Board Diversity Matrix (As of [DATE])
Foreign Issuer under Rule 5605(f)(1)
Country of Incorporation: [Insert Country Name]
Board Size:
Total Number of Directors #
Gender: Male Female Non-Binary Gender Undisclosed
Number of directors based on gender identity # # # #
Number of directors who identify in any of the categories below:
Underrepresented Individual in Home Country Jurisdiction #
Undisclosed #


26 September 2020


by Gibson Dunn

With talk about a second Coronavirus wave gathering pace, the German Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) is proposing to extend the temporary COVID-19-related legislation of March 2020 significantly simplifying the passing of shareholders’ resolution, including, in particular, the possibility to hold virtual-only shareholders’ meetings. The extension is proposed in unchanged form for another year until the end of 2021. A respective draft regulation has been published at short notice on 18 September 2020 and stakeholders are invited to submit their comments until 25 September 2020.

While the legislation of March 2020 was well received in the rise of the COVID-19 crisis the reactions to an extension were mixed so far. Criticism focuses on the significant restrictions of shareholders’ rights by this legislation (e.g. no right to ask questions or to counter-motions in real time, wide discretion of the management with respect to answering submitted questions, only limited appeal right etc.). This was raised not only by shareholders’ activists but also by various parliament members including prominent experts of the ruling coalition.

In the reasons of the draft regulation, the ministry strongly emphasizes that companies should only hold virtual-only meetings if actually required in the individual circumstances due to the pandemic. In addition, the ministry encourages the corporations in question to handle the Q&A process as shareholder-friendly as technically possible, including allowing for questions in real- time, if they decide to hold a virtual meeting.

The time window to debate the proposal is extremely short. The new shareholders’ meeting season is already approaching quickly, starting as early as in January/February 2021 for companies with business years ending on 30 September 2020. While the Ministry of Justice and Consumer Protection is authorized to extend the period of application of the legislation for another year without any modifications, modifications in substance would require the involvement of parliament and are thus deemed rather unlikely. If the proposal is adopted, it w ould be up to the corporations themselves to take the ministry’sappeal seriously and to make use of the virtual format in a responsible and shareholder-friendly manner.



5 August 2020

Shareholder Proposal Developments During the 2020 Proxy Season

by Gibson Dunn

This client alert provides an overview of shareholder proposals submitted to public companies during the 2020 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

Top Shareholder Proposal Takeaways from the 2020 Proxy Season

As discussed in further detail below, based on the results of the 2020 proxy season, there are several key takeaways to consider for the coming year:

- Shareholder proposal submissions continue to decline. The number of proposals submitted decreased by 9% from the prior year to 720, which was 11% lower than the five-year average of 809.

-The number of social and environmental proposals significantly decreased, leading to governance proposals being the most common. Social and environmental proposals declined notably, down 21% and 10%, respectively, from 2019. The number of governance proposals remained steady in 2020 compared to 2019 and represented 40% of proposals submitted, the single largest category during 2020. The five most popular proposal topics, representing 36% of all shareholder proposal submissions, were (i) written consent, (ii) climate change, (iii) anti-discrimination and diversity (although board diversity proposals were down more than 51% from 2019 levels), (iv) independent chair, and (v) lobbying spending.

- Overall no-action request success rates held steady, but Staff response letters declined significantly. The overall success rate for no-action requests held steady at 70%, driven primarily by substantial implementation, procedural, and ordinary business arguments. However, recent changes in the Staff’s practices for responding to no-action requests resulted in significantly fewer written explanations, with the Staff providing response letters only 18% of the time. Almost three-fourths of those Staff response letters were issued when the Staff concurred that a proposal was excludable or denied reconsideration.-

Company success rates using board analysis during this proxy season show promise. Although fewer companies included a board analysis during this proxy season (down 24% from 25 in 2019 to 19 this year), companies that included a board analysis had greater success, with the Staff concurring with the exclusion of four proposals during this year based on the company’s use of a board analysis, compared to just one proposal during the 2019 proxy season.

- Negotiated withdrawals decreased significantly. The overall percentage of proposals withdrawn decreased significantly to its lowest number since 2017. Only 14% of shareholder proposals were withdrawn this season, compared to 20% in 2019, due in part to declining withdrawal rates for social and environmental proposals (dropping to 25% from 38% in 2019).

- Overall voting support dipped slightly, including average support for social proposals, although support for environmental proposals continued to gain momentum. Average support for all shareholder proposals voted on was 31.3% of votes cast, down slightly from the 32.8% average in 2019 and 32.5% in 2018. In 2020, support for social (non-environmental) proposals was about 21.5%, down from 23.6% in 2019, whereas support for environmental proposals increased to 30.2% from 23.9% in 2019. Governance proposals continued to receive the highest average support at 35.3%. This year also saw a decrease in the number of shareholder proposals that received majority support (50 in total, down from 62 in 2019), with an increasing number of such proposals focused on issues other than traditional governance topics.

- Continued proliferation of new proponents and co-filers. The number of shareholders using the Rule 14a-8 shareholder proposal process continues to grow, with more than 300 proponents in each of 2020 and 2019 (compared to approximately 200 proponents in 2018). Approximately two-thirds of proposals were submitted by individuals and religious-affiliated organizations. As in prior years, John Chevedden and his associates were the most frequent proponents (filing 31% of all proposals in 2020). This year also saw the continued trend of multiple co-filers submitting proposals—for example, the number of proposals submitted by at least five co-filers has tripled since 2018.

- Proponents continue to use exempt solicitations and litigation. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing more than 40% over the last three years. This continues to be an area ripe for abuse—for example, nearly 20% of exempt solicitation filings in 2020 failed to comply with Staff guidance. In addition, for the second consecutive year, a proponent turned to the courts to fight the exclusion of an environmental proposal even before the Staff had issued its response to the related no-action request.

- Shareholder proposal reform remains pending. On November 5, 2019, the SEC proposed amending Rule 14a-8 to address certain eligibility requirements for submitting shareholder proposals and to raise resubmission thresholds. We anticipate that final rules will be adopted in the near term.

Read More



13 October 2019

Developments Regarding Changes to SEC Staff’s Shareholder Proposal No-Action Responses

by Gibson Dunn

Several noteworthy developments have occurred following the September 6, 2019 announcement by the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission (“SEC") regarding two significant procedural changes for responding to Exchange Act Rule 14a-8 no-action requests that will be applicable to no-action requests regarding shareholder proposals submitted for annual meeting to be held in 2020.  That announcement indicated that the Staff may now respond orally instead of in writing to shareholder proposal no-action requests and that the Staff may now more frequently respond by declining to state a view on whether or not it concurs that a company may properly exclude a shareholder proposal under Rule 14a-8.

Following the Staff's announcement, a coalition of investor-related organizations sent William Hinman, Director of the SEC's Division of Corporation Finance, a letter on September 19, 2019 criticizing the change in process.[1]  The letter asked that the Staff “rescind this change in process" or, if it does not, at least take certain steps “to reduce the level of uncertainty and conflict resulting from the new approaches."  The steps requested in the letter include using the new response options sparingly “until the implications are better understood," describing the criteria for when the Staff will use the new response options, signaling early in the process if the Staff will use one of the new response options (and clarifying if the Staff will wait until after the proponent has responded to make that decision), and maintaining visibility when the Staff uses one of the new response options (for example, indicating on the SEC's website any oral decisions and providing the same information to both parties).    

Subsequent remarks by the Staff have begun to provide additional specificity regarding these shareholder proposal no-action request procedural changes and the Staff's rationale for implementing the changes.  For example, in late September, Mr. Hinman indicated that the changes were driven by the Staff trying to think of “a new and creative approach" in responding to no-action requests.[2] 

With respect to oral responses, he indicated that they generally will be used for more routine matters (such as failure to provide ownership proof) and confirmed that the Staff will reflect those responses on the SEC's website in “real time" showing whether or not the Staff concurs that a shareholder proposal may be excluded.  With respect to no-action requests where the Staff declines to state a view, he commented that the Staff may take this approach when so-called “regulatory humility" is appropriate—that is, when the Staff believes that it is not in the best position to make a decision about the excludability of the shareholder proposal.  In remarks at an American Bar Association meeting in mid-September, Mr. Hinman noted that the Staff was not certain how frequently it would issue responses in which it declines to state a view on exclusion of a shareholder proposal.

While Mr. Hinman's statements address some of the concerns raised by the issuer and investor communities about the new procedures, the exact impact—especially where the Staff declines to express its views—will become clearer during the 2020 proxy season. 

[1]   Available at https://www.investorrightsforum.com/new-blog-1/five-investment-organizations-to-director-hinman-no-action-process-concerns-and-recommendations.  The letter was signed by Kenneth A. Bertsch, Executive Director at the Council of Institutional Investors; Lisa Woll, CEO at US SIF; Josh Zinner, CEO at the Interfaith Center on Corporate Responsibility; Mindy S. Lubber, CEO and President at Ceres; and Sanford Lewis, Director at the Shareholder Rights Group.

[2]   Based on remarks made at the Society for Corporate Governance Eastern Regional Conference on September 27, 2019.


24 August 2019

SEC Issues New Guidance for Proxy Advisors and Investment Advisers Engaged in the Proxy Voting Proces

On August 21, 2019, the Securities and Exchange Commission (the “Commission”) issued new guidance regarding two elements of the proxy voting process[1] that are influenced by proxy advisory firms: proxy voting advice issued by proxy advisors and proxy voting by investment advisers who use that proxy voting advice. The guidance, in the words of Commissioner Elad L. Roisman, “reiterate[s] longstanding Commission rules and positions that remain applicable and very relevant in today’s marketplace.” Notably, the two releases issued by the Commission are not subject to notice and comment and will instead become effective upon publication in the Federal Register.

Specifically, the Commission approved issuing both:

- a Commission interpretation that the provision of proxy voting advice by proxy advisory firms generally constitutes a “solicitation” under federal proxy rules and new Commission guidance about the availability of exemptions from the federal proxy rules and the applicability of the proxy anti-fraud rule to proxy voting advice (the “Proxy Voting Advice Release”);[2] and

- new Commission guidance intended to facilitate investment advisers’ compliance with the fiduciary duties owed to each client in connection with the exercise of investment advisers’ proxy voting responsibilities, including in connection with their use of proxy advisory firms (the “Proxy Voting Responsibilities Release”[3] and together, the “Releases”).

The Commission approved both Releases by a vote of 3-2, with Commissioners Robert J. Jackson, Jr. and Allison Herren Lee dissenting from each Release. In their statements explaining their opposition, Commissioners Jackson and Lee expressed concern that neither was subject to a notice and comment period, which prevented the Commission from fully considering the consequences of the new guidance.[4] Both Commissioners also questioned whether the Releases will increase costs associated with the provision and use of proxy voting advice, and Commissioner Lee expressed concern that greater issuer involvement in the proxy voting recommendation process could “undermine the reliability and independence of voting recommendations.”


Over the past several years, the Commission and its staff (the “Staff”) have issued statements and held public forums to discuss issues related to voting advice issued by proxy advisory firms and investment advisers’ reliance on that advice. For example, in July 2010, the Commission issued a concept release[5] that sought public comment on, among other topics, the legal status and role of proxy advisory firms.[6] And in June 2014, the staff of the Divisions of Investment Management and Corporation Finance issued Staff Legal Bulletin No. 20 (“SLB 20”),[7] which provided guidance on investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms and the availability and requirements of two exemptions to the federal proxy rules often relied upon by proxy advisory firms.[8]

Subsequently the Staff held a roundtable in November 2018 to provide an opportunity for market participants to engage with the Staff on various aspects of the proxy process (the “2018 Roundtable”).[9] The 2018 Roundtable included panels addressing each of the regulation of proxy advisory firms, proxy voting mechanics and technology, and shareholder proposals. Participants on the proxy advisory firms panel discussed investor advisers’ reliance on voting advice provided by proxy advisory firms, how proxy advisory firms address conflicts of interest and challenges issuers face in correcting factual errors in voting recommendations published by proxy advisory firms.[10]

Following the 2018 Roundtable, Chairman Jay Clayton announced that Commissioner Roisman would lead the Commission’s efforts to improve the proxy voting process and infrastructure.[11] In his opening remarks at the Commission’s August 21 meeting, Commissioner Roisman indicated that the Releases were the first of several matters that the Commission may consider in the near future relating to its proxy voting rules.[12] Other matters that Commissioner Roisman mentioned would likely be considered “in the near future” include proposed reforms to the rules addressing proxy advisory firms’ reliance on proxy solicitation exemptions and the rules regarding the thresholds for shareholder proposals announced as part of the Commission’s Spring 2019 Regulatory Flexibility Agenda.[13]

Summary of the Proxy Voting Advice Release

The Proxy Voting Advice Release, developed by the Commission’s Division of Corporation Finance, addresses two topics: the Commission articulates its view that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” subject to the federal proxy roles, and the Commission provides an interpretation and additional guidance on the applicability of the federal proxy rules to proxy voting advice that is designed to influence the voting decisions of a proxy advisory firm’s clients.

Proxy Voting Advice Constitutes a Solicitation Under the Federal Proxy Rules

As explained in the Proxy Voting Advice Release, under Rule 14a‑1(l) of the Securities Exchange Act of 1934 (the “Exchange Act”), a “solicitation” includes “a communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” This includes communications seeking to influence the voting of proxies, even if the person issuing the communication does not seek authorization to act as a proxy and may be indifferent to its ultimate outcome. Communications that constitute “solicitations” under Rule 14a‑1(l) are subject to the information and filing requirements of the federal proxy rules. However, Exchange Act Rule 14a-2(b)(1) provides an exemption from the Commission’s information and filing requirements (but not from the anti-fraud rules) for “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.”

Based on this background, in the Proxy Voting Advice Release the Commission explains that its interpretation is informed by the purpose, substance and circumstances under which the proxy voting advice is provided. Where a proxy advisory firm markets its expertise in the research and analysis of voting matters to assist a client in making proxy voting decisions by providing voting recommendations, the proxy advisory firm is not “merely performing administrative or ministerial services.” Instead, the Commission believes that providing such proxy voting recommendations constitutes a solicitation because the recommendations are “designed to influence the client’s voting decision.” Importantly, the Commission believes that such recommendations constitute a solicitation even where a proxy advisory firm bases its recommendations on its client’s own tailored voting guidelines or the client ultimately decides not to follow the proxy voting recommendations.[14]

The Commission makes clear that its interpretation does not prevent a proxy advisory firm from relying on the exemptions from the federal proxy rules information and filing requirements under Exchange Act Rule 14a-2(b)(1).[15] Nevertheless, the Commission’s interpretation is an important foundational basis for any subsequent regulation of proxy advisory firms that addresses conditions for the availability of Rule 14a-2(b)(1).

Proxy Voting Advice Remains Subject to Exchange Act Rule 14a-9

In the second part of the Proxy Voting Advice Release, the Commission emphasizes that even where a proxy advisory firm’s voting advice is otherwise exempt from the information and filing requirements of the federal proxy rules under Exchange Act Rule 14a-2(b)(1), that voting advice remains subject to the anti-fraud provisions of Exchange Act Rule 14a-9. Accordingly, when issuing proxy voting advice, proxy advisory firms may not make materially false or misleading statements or omit material facts that would be required to make the voting advice not misleading.

Exchange Act Rule 14a-9 prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact. In addition, solicitations may not omit any material fact necessary in order to make the solicitation false or misleading. Of particular importance for proxy voting advice based on the research and analysis of proxy advisory firms, Exchange Act Rule 14a-9 also extends to opinions, reasons, recommendations or beliefs that are disclosed as part of a solicitation. Where such opinions, recommendations or similar views are provided, disclosure of the underlying facts, assumptions, limitations and other information may need to be disclosed so that these views do not raise concerns under the rule.

Depending on the materiality of the information and the particular circumstances, the Commission indicates that proxy advisory firms may need to disclose additional information to avoid issues under Exchange Act Rule 14a-9, including:

- an explanation of the firm’s methodology used to formulate its voting advice on a particular matter;

- non-public information sources and the extent to which the information from these sources differs from the publicly available disclosures; and

- any material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts.

Summary of the Proxy Voting Responsibilities Release

Developed by the Commission’s Division of Investment Management, the Proxy Voting Responsibilities Release clarifies how an investment adviser’s fiduciary duties to its clients inform the investment adviser’s proxy voting responsibilities, particularly where investment advisers retain proxy advisory firms to assist in some aspect of their proxy voting responsibilities. Under Rule 206(4)-6 of the Investment Advisers Act of 1940, an investment adviser that assumes proxy voting authority must implement policies and procedures that are reasonably designed to ensure it makes voting decisions in the best interest of clients. The Commission reiterates throughout the Proxy Voting Responsibilities Release that proxy voting must be consistent with the investment adviser’s fiduciary duties and in compliance with Rule 206(4)-6.

The Proxy Voting Responsibilities Release sets forth six examples of considerations investment advisers should evaluate when discharging their fiduciary duties in connection with proxy voting. The Commission emphasizes that this list of considerations is non-exhaustive, and while its guidance is generally phrased as considerations or actions investment advisers “should” evaluate, the Commission further indicates that these examples are not the only way for investment advisers to discharge their fiduciary duties when voting proxies.

1. Determine the scope of the investment adviser’s proxy voting authority and responsibilities

If an investment adviser agrees to assume proxy voting authority, the scope of the voting arrangements should be determined between the investment adviser and each of its clients on an individual basis.  The Commission emphasizes that any proxy voting arrangements must be subject to full and fair disclosure and informed consent.

Among the variety of potential approaches to proxy voting arrangements, the Commission provides several examples to which an investment adviser and its client may appropriately agree, including the investment adviser exercising proxy voting authority pursuant to specific parameters designed to serve the best interests of the client based on the client’s individual investment strategy, the investment adviser refraining from exercising proxy voting authority under agreed circumstances or the investment adviser voting only on particular types of proposals based on the client’s express preferences.

2. Demonstrate that the investment adviser is making voting determinations in its clients’ best interests and in accordance with its proxy voting policies and procedures

The Commission indicates that investment advisers must at least annually review and document the adequacy of its proxy voting policies and procedures, including whether the policies and procedures are reasonably designed to result in proxy voting in the best interest of the investment adviser’s clients.

Because clients often have differing investment objectives and strategies, if an investment adviser has multiple clients then it should consider whether voting all of its clients’ shares under a uniform voting policy is in the best interest of each individual client.  Alternatively, an investment adviser should consider whether it should implement voting policies that are in line with the particular investment strategies and objectives of individual clients.  An investment adviser should also consider whether its voting policy or policies should be tailored to permit or require more detailed analysis for more complex matters, such as a corporate event or a contested director election.

In addition, where an investment adviser retains a proxy advisory firm to provide voting advice or execution services, the investment adviser should consider undertaking additional steps to evaluate whether its voting determinations are consistent with its voting policies and in the best interests of its clients.

3. Evaluate any proxy advisory firm in advance of retaining it

Before retaining a proxy advisory firm, investment advisers should consider whether the proxy advisory firm has the capacity and competency to adequately analyze the matters for which it is providing voting advice.  The Commission indicates that the scope of the investment adviser’s proxy voting authority and the services for which the proxy advisory firm has been retained should inform the considerations that the investment adviser undertakes.

Such consideration could include an assessment of the adequacy and quality of the proxy advisory firm’s staffing, personnel and/or technology.  In addition, investment advisers should consider the proxy advisory firm’s process for obtaining input from issuers and other clients with respect to its voting polices, methodologies and peer group design.

4. Evaluate processes for addressing potential factual errors, incompleteness or methodological weakness in a proxy advisory firm’s analysis

An investment adviser should have policies and procedures in place to ensure that its proxy voting decisions are not based on materially inaccurate or incomplete information provided by a proxy advisory firm.  By way of example, the Commission suggests that an investment adviser should consider periodically reviewing its ongoing use of the proxy advisory firm’s research or voting advice, including whether any potential errors, incompleteness or weaknesses materially affected the research or recommendations that the investment adviser relied on.

In addition, the Commission indicates that investment advisers should consider the proxy advisory firm’s policies and procedures to obtain current and accurate information, including the firm’s engagement with issuers, efforts to correct identified material deficiencies, disclosure regarding its sources of information and its methodologies for issuing voting advice and the firm’s consideration of facts unique to the issuer or proposal.

5. Adopt policies for evaluating proxy advisory firms’ services

Where an investment adviser has retained a proxy advisory firm to assist with its proxy voting responsibilities, the investment adviser should adopt policies and procedures that are designed to evaluate the services of the proxy advisory firm to ensure that votes are cast in the best interests of the investment adviser’s clients.

The Commission indicates that investment advisers should consider implementing policies and procedures to identify and evaluate a proxy advisory firm’s conflicts of interest on an on-going basis and evaluate the proxy advisory firm’s “capacity and competency” to provide voting advice and execute votes in accordance with the investment adviser’s instructions. In addition, investment advisers should consider how and when the proxy advisory firm updates its methodologies, guidelines and voting advice.

6. Determine when to exercise proxy voting opportunities

An investment adviser is not required to exercise every opportunity to vote in either of two circumstances—where the investment adviser and its client have agreed in advance that the investment adviser’s proxy voting authority is limited under certain circumstances and where the investment adviser and its client have agreed in advance that the investment adviser has authority to cast votes based on the best interests of the client.

In both situations, the investment adviser’s action must be in accordance with its prior agreement with its client. Moreover, where an investment adviser may refrain from voting because doing so is in the best interest of its client, the investment adviser should first consider its duty of care to its client in light of the scope of services it has agreed to assume.

Practical Considerations

Just as the Commission was divided in approving the Releases, reactions to the Releases are likely to vary among participants in the proxy process. For example, public companies may both view the Releases as a positive step and believe that additional Commission action is needed to address the errors, conflicts of interests and other challenges with proxy advisory firms.

The Commission was limited in the actions it could take via interpretation and issuing guidance in the Releases. However, the Commission signaled that the Staff is working on proposed rules “to address proxy advisory firms’ reliance on the proxy solicitation exemptions in Exchange Act Rule 14a‑2(b).” Given that the rulemaking process can be time-consuming, the Releases provide helpful immediate guidance heading into the 2020 proxy season. That said, it remains to be seen whether and to what extent the proxy advisory firms and their investment adviser-clients will adjust their practices in response to the Releases. For example, the proxy advisory firms may increase the disclosures included in their reports, particularly when they are relying on debated premises such as studies asserting that certain corporate governance or sustainability actions increase shareholder value. They may also be less willing to rely on information provided either by proponents or activists unless that information has been filed with the Commission. Investment advisers inclined to vote lock-step with proxy advisory firm recommendations may be more willing to engage with companies in advance of voting.

Similarly, the Commission’s statements on the application of Rule 14a-9 to proxy advisory firm reports and recommendations[16] may affect various proxy advisory firm practices due to the threat (real or perceived) of public companies commencing litigation against these firms in the event that statements in a proxy advisory firm’s report are viewed as materially false or misleading. For example, it is common to see parties in contested solicitations commence litigation under Rule 14a‑9 challenging the other side’s solicitation materials. It is not hard to envision similar litigation playing out in the future when there are differences of opinion as to whether a proxy advisory report contains information that is either inaccurate or misleading, or where it simply omits information that leaves the disclosed information materially misleading. As a result, proxy advisory firms may change their practices for vetting and issuing their voting recommendation reports; for example, the firms may be more inclined to provide drafts of their reports to public companies in advance of the reports being issued.


[1]   The two most influential proxy advisory firms are Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co.

[2]   Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Exchange Act Release No. 34-86721 (Aug. 21, 2019), available at https://www.sec.gov/rules/interp/2019/34-86721.pdf.

[3]   Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. IA-5325 and Investment Company Act Release No. IC-33605 (Aug. 21, 2019), available at https://www.sec.gov/rules/interp/2019/ia-5325.pdf.

[4]   See Commissioner Robert J. Jackson, Jr., “Statement on Proxy-Advisor Guidance” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-jackson-082119; Commissioner Allison Herren Lee, “Statement of Commissioner Allison Herren Lee on Proxy Voting and Proxy Solicitation Releases” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-lee-082119.

[5]   Concept Release on the U.S. Proxy System, Release No. 34-62495, 75 FR 42982 (July 22, 2010), available at https://www.sec.gov/rules/concept/2010/34-62495.pdf.

[6]   For additional information on the 2010 concept release, please see our client alert dated July 22, 2010, available at https://www.gibsondunn.com/securities-and-exchange-commission-issues-concept-release-seeking-public-comment-on-u-s-proxy-system/.

[7]   Staff Legal Bulletin No. 20 (June 30, 2014), available at http://www.sec.gov/interps/legal/cfslb20.htm.

[8]   For additional information regarding SLB 20, please see our client alert dated July 1, 2015, available at https://www.gibsondunn.com/sec-staff-releases-guidance-regarding-proxy-advisory-firms/.

[9]   See Securities and Exchange Commission, “Spotlight on Proxy Process” (Nov. 15, 2018), available at https://www.sec.gov/proxy-roundtable-2018.

[10]   See Securities and Exchange Commission Webcast Archive, “Roundtable on the Proxy Process” (Nov. 15, 2018), available at https://www.sec.gov/video/webcast-archive-player.shtml?document_id=111518roundtable.

[11]   See Chairman Jay Clayton, “Remarks for Telephone Call with SEC Investor Advisory Committee Members” (Feb. 6, 2019), available at https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-call-020619.

[12]   See Commission Elad L. Roisman, “Statement at the Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-roisman-082119.

[13]   See Agency Rule List - Spring 2019, available here.

[14]   In contrast, ISS previously asked the Commission to confirm that “a registered investment adviser who is contractually obligated to furnish vote recommendations based on client-selected guidelines does not provide ‘unsolicited’ proxy voting advice, and thus is not engaged in a ‘solicitation’ subject to the Exchange Act proxy rules.” Letter from Gary Retelny, President and CEO, ISS, to Brent J. Fields, Secretary, Commission (Nov. 7, 2018), available at https://www.sec.gov/comments/4-725/4725-4629940-176410.pdf.

[15]   For additional information regarding the Staff’s views on the availability of such exemptions for proxy advisory firms, please see our client alert regarding SLB 20 dated July 1, 2015, available at https://www.gibsondunn.com/sec-staff-releases-guidance-regarding-proxy-advisory-firms/.

[16]   The solicitation exemption in Rule 14a-2(b)(3) explicitly does not also provide an exemption from Rule 14a-9.


Thanks to associate Geoffrey Walter in Washington, D.C. for his assistance in the preparation of this client update.



14 August 2019

SEC August 21 Open Meeting To Address Issues Related To Proxy Advisory Firms

by Gibson Dunn

The SEC announced that it will hold an open meeting on Wednesday, August 21, 2019 at 10:00 AM eastern time.  There are two matters on the agenda, available here, which, although not specifically referring to proxy advisory firms, appear to address reliance on voting recommendations issued by such firms, and the conditions such firms must satisfy to rely on an exemption from the proxy rules. 

The first agenda item is a Division of Investment Management matter captioned “Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers.”  The SEC’s notice describes this matter as follows: 

The Commission will consider whether to publish guidance regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act of 1940, and Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940.

The second agenda item is a Division of Corporation Finance matter captioned “Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice.”  The notice describes this matter as follows: 

The Commission will consider whether to publish an interpretation and related guidance regarding the applicability of certain rules, which the Commission has promulgated under Section 14 of the Securities Exchange Act of 1934, to proxy voting advice.

This item appears related to the rulemaking addressed in the SEC’s most recent Reg Flex agenda, which stated that the Division of Corporation Finance “is considering recommending that the Commission propose rule amendments to address certain advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b).” 

In November 2018, the Staff held a roundtable to provide an opportunity for market participants to address various aspects of the proxy process, including regulation of proxy advisors.  In February 2019, Chairman Clayton announced that Commissioner Elad Roisman would lead the SEC’s efforts to improve the proxy voting process and infrastructure.  The August 21 open meeting appears to be the next step in the SEC’s review of the proxy voting and proxy advisory firm process.


6 June 2019

Bernie Sanders confronts Walmart bosses and urges $15 an hour minimum wage

by Lauren Gambino (The Guardian)

- Sanders attends annual shareholder meeting in Arkansas

- Country’s largest retailer employs nearly 1.5m Americans

Bernie Sanders brought his years-long crusade against Walmart to the company’s annual shareholders meeting in Arkansas on Wednesday, demanding the nation’s largest retailer raise its wages and put workers on its board.

Sanders, who has once again made income inequality a central theme of his presidential campaign, confronted Walmart executives at the brief gathering, where he made the case for a proposal that would add hourly workers to the company’s corporate board and raise its minimum wage to $15 an hour.

“Walmart can strike a blow against corporate greed and a grotesque level of income and wealth inequality that exists in our country,” Sanders said in his three-minute remarks at the meeting, held in Rogers, Arkansas. “Please do the right thing.”

Sanders, who in the 2020 election is making his second attempt to become the Democratic nominee for president, attended the meeting as proxy for Carolyn “Cat” Davis, a Walmart employee and labor activist who is a member of the labor advocacy group, United for Respect.

The proposal along with a separate resolution introduced by an employee that sought to strengthen Walmart’s sexual harassment policies were overwhelmingly defeated in a shareholder vote later that afternoon.

In his remarks, Sanders pointedly criticized Walmart’s leadership, singling out the Walton family, which founded the company and is collectively the wealthiest family in the US, as well as the retailer’s CEO, Doug McMillon, who welcomed the senator to the meeting in his opening remarks.

“Despite the incredible wealth of its owner, Walmart pays many of its employees starvation wages, wages that are so low that many of these employees are forced to rely on government programs like food stamps, Medicaid and public housing in order to survive,” Sanders said. “Frankly, the American people are sick and tired of subsidizing the greed of some of the largest and most profitable corporations in this country.”

He added that McMillon earned more than $20m in 2018, which is roughly a thousand times more than the average salary earned by Walmart’s employees.

Before Sanders spoke, McMillon defended Walmart, touting the company’s decision to raise its minimum wage to $11 per hour and to provide benefits such as advanced job training and paid time off. Walmart has said it pays an average of $17.50 an hour to its hourly employees, including benefits.

“We are not perfect, but together we are listening, learning and changing,” he said, taking an opportunity to urge Congress to pass a “thoughtful plan” to raise the federal minimum wage.

Walmart, which is based in Bentonville, Arkansas, employs nearly 1.5 million people and is the largest private-sector employer in the US.

Sanders attended the company’s formal business meeting on Wednesday, which lasted just over 25 minutes. In a few days, Walmart will hold its annual shareholder celebration, which draws thousands of employees and features celebrities and live performances.

Still, the shareholders’ meeting offered Sanders a high-profile platform to demonstrate his solidarity with the workers he hopes will help him capture the nomination, which he lost to Hillary Clinton in 2016. After the meeting, Sanders announced that he would join McDonald’s workers at a rally to raise the minimum wage in Iowa this weekend.

In 2018, Sanders introduced the Stop Walmart Act, that would have blocked large companies from buying back stocks unless they paid employees at least $15 an hour, provided workers with paid sick leave and limited CEO compensation.

Walmart has raised its minimum wage twice since 2016 to $11 an hour. But it remains lower than rivals such as Amazon, Target and Costco.


30 April 2019

S.D.N.Y. Decision May Have Significant Impact on Bankruptcy Code “Safe Harbor” for Securities Transactions

by Gibson Dunn

On April 23, 2019, in In re Tribune Co. Fraudulent Conveyance Litigation, 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019) (“Tribune”), Judge Denise Cote of the District Court for the Southern District of New York held that the Bankruptcy Code “safe harbor” provision in 11 U.S.C. § 546(e) prevents a plaintiff from clawing back payments that Tribune Company (“Tribune”) made to public shareholders in 2007 as part of a go-private transaction.[1]  Section 546(e) bars a trustee from asserting a claim for constructive fraudulent transfer to avoid (or undo) a “settlement payment” (i.e., a payment for securities) made by or to certain protected entities (“Covered Entities”), including a “financial institution.”[2] 

The decision is important because it is one of the first, if not the first, to specially address footnote 2 in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), which opinion was viewed as severely limiting the scope of the safe harbor.

I.  Supreme Court Decision in Merit Management

On February 27, 2018, the Supreme Court in Merit Management held that the safe harbor does not protect a transfer that merely passed through a Covered Entity, where neither the transferor nor the transferee is itself a Covered Entity.[3]  By way of footnote 2, the Supreme Court expressly avoided addressing whether, because the Bankruptcy Code defines a “financial institution” to include the “customer” of a “financial institution” under certain circumstances,[4] the safe harbor protects a transfer made by or to a party that constitutes a protected “customer” but is not otherwise a Covered Entity.[5]  That was the issue decided in Tribune.

II.  Background in Tribune

In 2007, Tribune, a public company, consummated a tender offer and then went private through a merger six months later.  In the tender offer, Tribune borrowed funds and transmitted the cash required to repurchase approximately 50% of its outstanding shares to Computershare Trust Company, N.A. (“CTC”), which acted as “Depository.”  CTC, on Tribune’s behalf, then accepted and held tendered shares and paid out $34 per share to tendering shareholders.  In the merger, CTC acted as an “Exchange Agent” and performed essentially the same function.

One year after the merger, on December 8, 2008, Tribune and various subsidiaries commenced chapter 11 bankruptcy cases.  A litigation trust was established pursuant to Tribune’s chapter 11 plan, and the trustee (“Trustee”) pursued a claim to recover the tender offer and merger payments from Tribune’s former shareholders, alleging that the payments constituted an actual fraudulent transfer under 11 U.S.C. § 548(a)(1)(A).[6]  The Trustee did not bring a claim for constructive fraudulent transfer because he acknowledged that, based on controlling Second Circuit law at the time, the safe harbor barred the claim because the payments went through CTC.[7]  After the Supreme Court rejected that theory in Merit Management, the Trustee filed a motion for leave to amend his complaint to add a claim for constructive fraudulent transfer.

III.  District Court Held That Section 546(e) Protects Tribune’s Shareholder Payments Because They Were Made By a “Financial Institution” (i.e., Tribune)

Judge Cote denied the Trustee’s motion for leave to amend on grounds including futility, holding that the safe harbor still bars the Trustee’s proposed claim, notwithstanding Merit Management, because Tribune constituted a “financial institution.”  That conclusion rested on four premises: (1) it was “undisputed” that CTC is a “financial institution” because it is a “bank” and “trust company”; (2) Tribune was CTC’s “customer” based on the “ordinary meaning” of that term because “Tribune engaged the CTC’s services as depositary in exchange for a fee” and “was a ‘purchaser’ of CTC’s ‘services’”; (3) CTC acted as Tribune’s “agent,” based on the “well-settled meaning of th[at] common-law term[],” because “CTC was entrusted with billions of dollars of Tribune cash and was tasked with making payments on Tribune’s behalf to Shareholders upon the tender of their stock certificates to CTC,” which “is a paradigmatic principal-agent relationship”; and (4) “CTC acted ‘in connection with a securities contract,’” which is broadly defined to include any agreement to repurchase securities, as Tribune had done.[8]

The Trustee argued that “reading the definition of ‘financial institution’ to cover an entity like Tribune would run counter to the spirit of the Supreme Court’s decision in Merit Management, which rejected the idea that a bank or trust company acting as a ‘mere conduit’ can be sufficient ground to invoke the safe harbor provision.”[9]  Rejecting that argument, Judge Cote noted that “the Supreme Court specifically declined to address the scope of the definition of ‘financial institution,’” and, ultimately, “[t]he text of Section 101(22)(A) compels the conclusion that Tribune itself was a ‘financial institution.’”[10]

IV.  Takeaways from Tribune

The customer-as-financial-institution argument accepted in Tribune offers a potential defense to a claim for constructive fraudulent transfer, which is most important in situations where neither the transferor nor the transferee is otherwise a Covered Entity.  It remains to be seen whether other courts will follow Tribune,[11] and, if so, whether its holding will be extended beyond large public securities transactions (as in Tribune) to small public or private transactions where a bank facilitates a payment for securities (as in Merit Management).  In any event, Tribune signals a potential step toward regaining some of the safe harbor’s protective ground that appeared lost in Merit Management.

[1]   Gibson, Dunn & Crutcher LLP represents certain shareholders and directors in this litigation.
[2]   11 U.S.C. § 546(e).
[3]   138 S. Ct. 883.  The decision is discussed in greater detail in our previous client alert.  See Garza, Oscar, Rosenthal, Michael & Levin, Douglas, Supreme Court Settles Circuit Split Concerning Bankruptcy Code “Safe Harbor” (Mar. 5, 2018).
[4]   See 11 U.S.C. § 101(22)(A) (“The term ‘financial institution’ means . . . a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer . . . in connection with a securities contract . . . such customer[.]”) (emphasis added).
[5]   See 138 S. Ct. at 890 n.2 (“The parties here do not contend that either the debtor or petitioner in this case qualified as a ‘financial institution’ by virtue of its status as a ‘customer’ under § 101(22)(A). . . .  We therefore do not address what impact, if any, § 101(22)(A) would have in the application of the § 546(e) safe harbor.”).
[6]   The actual fraudulent transfer claim was dismissed on January 6, 2017.  See In re Tribune Fraudulent Conveyance Litig., 2017 WL 82391 (S.D.N.Y. Jan. 6, 2017).
[7]   Tribune, at *2 (“The law in the Second Circuit at that time was that section 546(e) applied to any transaction involving one of the financial entities listed in that section, ‘even as a conduit.’”) (quoting In re Quebecor World (USA) Inc., 719 F.3d 94, 100 (2d Cir. 2013)).
[8]   Id. at *9-11.
[9]   Id. at *12.
[10]   Id.
[11]   Tribune is also subject to appeal.


20 April 2019

Open letter to Jeff Bezos and the Amazon Board of Directors

Jeff Bezos and Board of Directors:

We, the undersigned 6,562* Amazon employees, ask that you adopt the climate plan shareholder resolution and release a company-wide climate plan that incorporates the principles outlined in this letter.

Amazon has the resources and scale to spark the world’s imagination and redefine what is possible and necessary to address the climate crisis. We believe this is a historic opportunity for Amazon to stand with employees and signal to the world that we’re ready to be a climate leader.

Climate change is an existential threat.  <more>



30 March 2019

Intermediaries have been advised by Apple Inc. that registration to attend their March 1st Shareholder Meeting has reached maximum capacity and no additional registrations are being accepted at this time. 

To vote at the meeting using a Legal Proxy you must have previously successfully registered to attend the meeting. Receiving a Legal Proxy does not constitute registration for the meeting.  Please confirm that you have successfully registered to attend the meeting prior to proceeding with your plan to attend.

Honi soit qui mal y pense,
might there be a creative tabulation, assuring the aspired voting results...


23 March 2019

NYSE Amends Shareholder Approval Rule

On March 20, 2019, the SEC approved changes to the NYSE's shareholder approval rule. The changes amend the price requirements that companies must meet to qualify for exceptions to the shareholder approval requirements under NYSE's rule 312.03(b) (related party issuances) and 312.03(c) (the 20% rule).  The NYSE changes are comparable to changes made to Nasdaq's 20% shareholder approval rule in September 2018. Our prior post on the Nasdaq amendment can be found here.  

The new rules replace the concept of “market value" with a “Minimum Price" for purposes of determining whether exceptions to the shareholder approval requirements apply.  The Minimum Price is defined as the lower of (i) the official closing price on the NYSE as reported immediately preceding the signing of a binding agreement to issue securities, and (ii) the average of the official closing price for the five trading days immediately preceding the signing of a binding agreement to issue securities.

The NYSE amendment also eliminates the prior requirement that the price paid be no less than book value per share to qualify for the shareholder approval exceptions in Sections 312.03(b) and (c).  The book value requirement has now been eliminated, leaving in place the requirement that price be at least equal to the Minimum Price.  Note that all other requirements for shareholder approval under NYSE's rules remain unchanged.

A link to the NYSE rule 312.03 and 312.04 as amended can be found here.

A link to the SEC release approving the rule change can be found here.

A link to Nasdaq Rule 5635 as amended can be found here.


21 October 2018

The SEC Adopts Strategic Plan for 2018-2022

On June 19, 2018, the Securities and Exchange Commission (the “SEC") published a draft strategic plan outlining the SEC's priorities through 2022 (the “Plan Draft"). As previously reported, the Plan Draft comprised three broad goals: focusing on retail investors, increasing innovation, and strengthening performance.

After seeking public comment on the Plan Draft until July 25, 2018, the SEC ultimately published the final strategic plan (the “Final Plan") on October 11, 2018. The Final Plan is an exact replica of the Plan Draft, save for the redaction of four names from Chairman Jay Clayton's “Message from the Chairman" in lieu of a general thank you to his fellow Commissioners. The change was likely precipitated by the departure of Commissioner Michael Piwowar in July and the subsequent appointment of Commissioner Elad Roisman to the SEC in September. While the Plan Draft also included a statement that the Commissioners hoped to “gain the benefit of additional outside perspectives" through the public review and comment process, the SEC ultimately stuck to its guns and adopted the Plan Draft in its entirety.

The Final Plan's first broad goal is to focus on the long-term interests of “Main Street" investors through five initiatives. First, the SEC intends to educate itself on the breadth of investment participation so as to better tailor its resources to the reality of modern capital markets. Armed with this knowledge, the SEC's subsequent mission is to enhance outreach and education in a way that reflects the diversity of modern investors and businesses. Additionally, the SEC plans to expand efforts in enforcement and deterrence of securities manipulation, fraud, and abuse, while also modernizing EDGAR and information delivery to make it easier for investors to acquire, and filers to disseminate, key information. Lastly, the SEC hopes to increase investment opportunities by expanding the amount of SEC-registered and exchange-listed companies in play.

The second goal for the SEC in the coming years is to stay abreast of technological innovation, particularly with an eye toward globalization. By continually learning and adapting, the SEC aims to make sure it remains an effective regulator. Moreover, the SEC intends to be self-reflective and self-critical when it comes to its current rules and procedures with the help of public feedback. While addressing the increase in cybersecurity risks for market participants, the SEC aspires to be prepared for any market emergency.

The last goal of the Final Plan is to elevate the SEC's own performance. This is to be accomplished by promoting diversity, inclusion, and equality among the agency's staff; leveraging data analytics, risk analytics, and data management; and actively investing in tools that uncover violations of securities laws. The SEC plans to establish a new Chief Risk Officer position to promote its cybersecurity efforts, but also seeks to more efficiently promote collaboration and information sharing across current agency staff.

The SEC's strategic plan was developed through discussions with congressional committees and members of Congress, investors, businesses, academics, and experts, and through the use of meetings, formal outreach programs, Commission-sponsored roundtables, conferences, and broad solicitation. While the goals are both laudable and lofty, they do not represent a dramatic departure from its past mission statements. Each Chairman adds his or her own focus. The last Chair, Mary Jo White, a former prosecutor, seemed more focused on the enforcement program, with an eye to policing minor technical violations of the law (referred to as "broken windows"). Chairman Clayton seems more focused on protection of the capital markets, technology and enforcement actions against those who prey on retail investors.   


9 October 2018

Fresenius Marks a Watershed Development in the Analysis of "Material Adverse Effect" Clauses

by Gibson Dunn

On October 1, 2018, in Akorn, Inc. v. Fresenius Kabi AG,[1]  the Delaware Court of Chancery determined conclusively for the first time that a buyer had validly terminated a merger agreement due to the occurrence of a "material adverse effect" (MAE). Though the decision represents a seminal development in M&A litigation generally, Vice Chancellor Laster grounded his decision in a framework that comports largely with the ordinary practice of practitioners. In addition, the Court went to extraordinary lengths to explicate the history between the parties before concluding that the buyer had validly terminated the merger agreement, and so sets the goalposts for a similar determination in the future to require a correspondingly egregious set of facts. As such, the ripple effects of Fresenius in future M&A negotiations may not be as acute as suggested in the media.[2] 

Factual Overview

On April 24, 2017, Fresenius Kabi AG, a pharmaceutical company headquartered in Germany, agreed to acquire Akorn, Inc., a specialty generic pharmaceutical manufacturer based in Illinois. In the merger agreement, Akorn provided typical representations and warranties about its business, including its compliance with applicable regulatory requirements. In addition, Fresenius's obligation to close was conditioned on Akorn's representations being true and correct both at signing and at closing, except where the failure to be true and correct would not reasonably be expected to have an MAE. In concluding that an MAE had occurred, the Court focused on several factual patterns:

- Long-Term Business Downturn. Shortly after Akorn's stockholders approved the merger (three months after the execution of the merger agreement), Akorn announced year-over-year declines in quarterly revenues, operating income and earnings per share of 29%, 84% and 96%, respectively. Akorn attributed the declines to the unexpected entrance of new competitors, the loss of a key customer contract and the attrition of its market share in certain products. Akorn revised its forecast downward for the following quarter, but fell short of that goal as well and announced year-over-year declines in quarterly revenues, operating income and earnings per share of 29%, 89% and 105%, respectively. Akorn ascribed the results to unanticipated supply interruptions, added competition and unanticipated price erosion; it also adjusted downward its long-term forecast to reflect dampened expectations for the commercialization of its pipeline products. The following quarter, Akorn reported year-over-year declines in quarterly revenues, operating income and earnings per share of 34%, 292% and 300%, respectively. Ultimately, over the course of the year following the signing of the merger agreement, Akorn's EBITDA declined by 86%.

- Whistleblower Letters. In late 2017 and early 2018, Fresenius received anonymous letters from whistleblowers alleging flaws in Akorn's product development and quality control processes. In response, relying upon a covenant in the merger agreement affording the buyer reasonable access to the seller's business between signing and closing, Fresenius conducted a meticulous investigation of the Akorn business using experienced outside legal and technical advisors. The investigation revealed grievous flaws in Akorn's quality control function, including falsification of laboratory data submitted to the FDA, that cast doubt on the accuracy of Akorn's compliance with laws representations. Akorn, on the other hand, determined not to conduct its own similarly wide-ranging investigation (in contravention of standard practice for an FDA-regulated company) for fear of uncovering facts that could jeopardize the deal. During a subsequent meeting with the FDA, Akorn omitted numerous deficiencies identified in the company's quality control group and presented a "one-sided, overly sunny depiction."

- Operational Changes. Akorn did not operate its business in the ordinary course after signing (despite a covenant requiring that it do so) and fundamentally changed its quality control and information technology (IT) functions without the consent of Fresenius. Akorn management replaced regular internal audits with "verification" audits that only addressed prior audit findings rather than identifying new problems. Management froze investments in IT projects, which reduced oversight over data integrity issues, and halted efforts to investigate and remediate quality control issues and data integrity violations out of concern that such investigations and remediation would upend the transaction. Following signing, NSF International, an independent, accredited standards development and certification group focused on health and safety issues, also identified numerous deficiencies in Akorn's manufacturing facilities.

Conclusions and Key Takeaways

The Court determined, among others, that the sudden and sustained drop in Akorn's business performance constituted a "general MAE" (that is, the company itself had suffered an MAE), Akorn's representations with respect to regulatory compliance were not true and correct, and the deviation between the as-represented condition and its actual condition would reasonably be expected to result in an MAE. In addition, the Court found that the operational changes implemented by Akorn breached its covenant to operate in the ordinary course of business.

Several aspects of the Court's analysis have implications for deal professionals:

- Highly Egregious Facts. Although the conclusion that an MAE occurred is judicially unprecedented in Delaware, it is not surprising given the facts. The Court determined that Akorn had undergone sustained and substantial declines in financial performance, credited testimony suggesting widespread regulatory noncompliance and malfeasance in the Akorn organization and suggested that decisions made by Akorn regarding health and safety were re-prioritized in light of the transaction (and in breach of a highly negotiated interim operating covenant). In In re: IBP, Inc. Shareholders Litigation, then-Vice Chancellor Strine described himself as "confessedly torn" over a case that involved a 64% year-over-year drop-off in quarterly earnings amid allegations of improper accounting practices, but determined that no MAE had occurred because the decline in earnings was temporary. In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., Vice Chancellor Lamb emphasized that it was "not a coincidence" that "Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement" and concluded the same, given that the anticipated decline in the target's EBITDA would only be 7%. No such hesitation can be found in the Fresenius opinion.[3]

- MAE as Risk Allocation Tool. The Court framed MAE clauses as a form of risk allocation that places "industry risk" on the buyer and "company-specific" risk on the seller. Explained in a more nuanced manner, the Court categorized "business risk," which arises from the "ordinary operations of the party's business" and which includes those risks over which "the party itself usually has significant control", as being retained by the seller. By contrast, the Court observed that the buyer ordinarily assumes three others types of risk—namely, (i) systematic risks, which are "beyond the control of all parties," (ii) indicator risks, which are markers of a potential MAE, such as a drop in stock price or a credit rating downgrade, but are not underlying causes of any MAE themselves, and (iii) agreement risks, which include endogenous risks relating to the cost of closing a deal, such as employee flight. This framework comports with the foundation upon which MAE clauses are ordinarily negotiated and underscores the importance that sellers negotiate for industry-specific carve-outs from MAE clauses, such as addressing adverse decisions by governmental agencies in heavily regulated industries.

- High Bar to Establishing an MAE. The Court emphasized the heavy burden faced by a buyer in establishing an MAE. Relying upon the opinions that emerged from the economic downturns in 2001 and 2008,[4]  the Court reaffirmed that "short-term hiccups in earnings" do not suffice; rather, the adverse change must be "consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months." The Court underscored several relevant facts in this case, including (i) the magnitude and length of the downturn, (ii) the suddenness with which the EBITDA decline manifested (following five consecutive years of growth) and (iii) the presence of factors suggesting "durational significance," including the entrance of new and unforeseen competitors and the permanent loss of key customers.[5]

- Evaluation of Targets on a Standalone Basis. Akorn advanced the novel argument that an MAE could not have occurred because the purchaser would have generated synergies through the combination and would have generated profits from the merger. The Court rejected this argument categorically, finding that the MAE clause was focused solely on the results of operations and financial condition of the target and its subsidiaries, taken as a whole (rather than the surviving corporation or the combined company), and carved out any effects arising from the "negotiation, execution, announcement or performance" of the merger agreement or the merger itself, including "the generation of synergies." Given the Court's general aversion to considering synergies as relevant to determining an MAE, buyers should consider negotiating to include express references to synergies in defining the concept of an MAE in their merger agreements.

- Disproportionate Effect. Fresenius offers a useful gloss on the importance to buyers of including "disproportionate effects" qualifications in MAE carve-outs regarding industry-wide events. Akorn argued that it faced "industry headwinds" that caused its decline in performance, such as heightened competition and pricing pressure as well as regulatory actions that increased costs. However, the Court rejected this view because many of the causes of Akorn's poor performance were actually specific to Akorn, such as new market entrants in Akorn's top three products and Akorn's loss of a specific key contract. As such, these "industry effects" disproportionately affected and were allocated from a risk-shifting perspective to Akorn. To substantiate this conclusion, the Court relied upon evidence that Akorn's EBITDA decline vastly exceeded its peers.

- The Bring-Down Standard. A buyer claiming that a representation given by the target at closing fails to satisfy the MAE standard must demonstrate such failure qualitatively and quantitatively. The Court focused on a number of qualitative harms wrought by the events giving rise to Akorn's failure to bring down its compliance with laws representation at closing, including reputational harm, loss of trust with principal regulators and public questioning of the safety and efficacy of Akorn's products. With respect to quantitative measures of harm, Fresenius and Akorn presented widely ranging estimates of the cost of remedying the underlying quality control challenges at Akorn. Using the midpoint of those estimates, the Court estimated the financial impact to be approximately 21% of Akorn's market capitalization. However, despite citing several proxies for financial performance suggesting that this magnitude constituted an MAE, the Court clearly weighted its analysis towards qualitative factors, noting that "no one should fixate on a particular percentage as establishing a bright-line test" and that "no one should think that a General MAE is always evaluated using profitability metrics and an MAE tied to a representation is always tied to the entity's valuation." Indeed, the Court observed that these proxies "do not foreclose the possibility that a buyer could show that percentage changes of a lesser magnitude constituted an MAE. Nor does it exclude the possibility that a buyer might fail to prove that percentage changes of a greater magnitude constituted an MAE."

Fresenius offers a useful framework for understanding how courts analyze MAE clauses. While this understanding largely comports with the approach taken by deal professionals, the case nevertheless offers a reminder that an MAE, while still quite unlikely, can occur. Deal professionals would be well-advised to be thoughtful about how the concept should be defined and used in an agreement.

[1]   Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018).
[2]   See, e.g., Jef Feeley, Chris Dolmetsch & Joshua Fineman, Akorn Plunges After Judge Backs Fresenius Exit from Deal, Bloomberg (Oct 1, 2018) ("'The ruling is a watershed moment in Delaware law, and will be a seminal case for those seeking to get out of M&A agreements,' Holly Froum, an analyst with Bloomberg Intelligence, said in an emailed statement."); Tom Hals, Delaware Judge Says Fresenius Can Walk Away from $4.8 Billion Akorn Deal, Reuters (Oct. 1, 2018) ("'This is a landmark case,' said Larry Hamermesh, a professor at Delaware Law School in Wilmington, Delaware.").
[3]   The egregiousness of the facts in this case is further underscored by the fact that the Court determined that the buyer had breached its own covenant to use its reasonable best efforts to secure antitrust clearance, but that this breach was "temporary" and "not material."
[4]   See, e.g., Hexion Specialty Chems. Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008); In re: IBP, Inc. S'holders Litig., 789 A.2d 14 (Del. Ch. 2001).
[5]   This view appears to comport with the analysis highlighted by the Court from In re: IBP, Inc. Shareholders Litigation, in which the court determined that an MAE had not transpired in part because the target's "problems were due in large measure to a severe winter, which adversely affected livestock supplies and vitality." In re: IBP, 789 A.2d at 22. In this case, the decline of Akorn was not the product of systemic risks or cyclical declines, but rather a company-specific effect.


18 July 2018


by Gibson Dunn

Overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year:

- Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention. Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors. In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%. However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds).

- It’s generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas. Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015. This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents. However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request. In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.

- Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward. The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases. Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business. In practice, none of the ordinary business no-action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful). Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance. It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis.

- Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted. Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support. We expect these proposals will continue to be popular going into next year. Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals. In addition, large asset managers are increasingly articulating their support for greater board diversity.

- Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings. Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016. With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year. At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny.

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20 March 2018

Disney shareholders reject CEO Iger’s pay package


Walt Disney Co. shareholders turned an authoritative thumbs down in an advisory vote on the company’s rich executive pay plan, which delivered $36.3 million to Chief Executive Officer Bob Iger and is likely to reward him even more in fiscal 2018.

Investors voted 52 percent against the non-binding advisory resolution on executive compensation, with 44 percent in favor and 4 percent abstaining, the company said in a statement from its annual meeting in Houston. It’s the first time since federal regulators began encouraging such votes at companies that Disney shareholders rejected the plan. The company said it will take the vote under advisement in weighing future pay.

Changes to Remuneration Policy:

- Base salary to be increased to $3 million for 2018 and $3.5 million thereafter.

- Annual target bonus allocation is $12 million and can reach 200% of the award. In 2017, Iger received $15.2 million (127% of the target). Starting in 2018, the annual target allocation will be $20 million and  can reach 200% of the target, or $40 million.

- For the LTIP (both RSUs and options), the target in 2018 will be $25 million and can reach 200% of the target, or $50 million.

- Assuming the same other compensation amount of $1.3 million, fair value of compensation for “meeting targets” will be $49.8 million and can reach a maximum of $94.8 million.

Transaction with 21st Century Fox:

- Iger received 245,098 RSUs that will vest over four years “regardless of whether the tansaction is completed”. Using the numbers above, at $105.46/share, these RSUs are valued at $25.85 million;

- Iger received 687,898 performance-based RSUs that  that will vest on December 31, 2021 if (1) the acquisition transaction is completed and (2) subject to satisfaction of a performance-vesting requirement based on TSR vs. S&P500. Up to 150% of this award could vest. This award is valued at $72.55 million and can reach a maximum of $109 million;

Other elements:

- According to his original contract, Iger is entitled to a cash bonus of $5 million just for the mere fact of being employed as CEO until July 2, 2019;

- Following his retirement, Iger will be hired as a consultant for the company for 3 years where he will receive $500,000 per quarter for the first eight quarters, and $250,000 per quarter thereafter (the contract was amended to 5 years and $500,000 per quarter all throughout said period). So in his first year as a consultant he could cost the company $2 million in consulting fees and  additional security services (which exclude the use of Company provided or leased aircraft; cost in 2017 was $900,000).


17 March 2018

New Twist for Old Shareholder Proposal Tactic

by Gibson Dunn

Each year some public pension funds and other institutional shareholders voluntarily file with the U.S. Securities and Exchange Commission (SEC) a Notice of Exempt Solicitation under Exchange Act Rule 14a-6(g).  This rule requires a person who owns more than $5 million of a company’s securities and who conducts an exempt solicitation of the company’s shareholders (in which the person does not seek to have proxies granted to them) to file with the SEC all written materials used in the solicitation.  However, these funds also file these Notices, which appear on EDGAR as “PX14A6G” filings, typically to respond to a company’s statement in opposition to a shareholder proposal included in the proxy statement or to otherwise encourage (but not solicit proxies from) shareholders to vote a specific way on shareholder proposals, say on pay proposals and in “vote no” campaigns. 

In a new twist, this week John Chevedden (the most prolific individual shareholder proponent given that he submits them in his own name and by using “proposal by proxy” to submit proposals for other shareholders) filed his first Notice of Exempt Solicitation.  Chevedden’s Notice addresses a proposal included in the AES Corp. proxy materials to ratify the company’s existing 25% special meeting ownership threshold.  The SEC staff previously concurred that AES could exclude from its proxy materials Chevedden’s shareholder proposal requesting a 10% special meeting threshold pursuant to Rule 14a-8(i)(9) because the company’s ratification proposal and the shareholder proposal conflicted.  See The AES Corp. (avail. Dec. 19, 2017). 

Chevedden’s filing consists of a “Shareholder Memo” to AES shareholders that criticizes the AES special meeting ratification proposal, includes a link to the SEC no-action letter concurring with the exclusion of Chevedden’s proposal, and urges shareholders to vote “against” the AES ratification proposal.  Chevedden’s Notice is available here.  (Chevedden subsequently filed a similar, but lengthier, notice at CF Industries Holdings, Inc. even before the company filed its definitive proxy statement, which is available here.)

Chevedden likely does not own more than $5 million in AES stock.  In fact, his broker letter provided to AES states that he owned “no fewer than” 250 AES shares as of October 13, 2017.  (Assuming he owned 250 shares, the value of those shares based on the closing price on that date was less than $2,900.)  However, the SEC has not to date restricted shareholders owning less than $5 million of a company’s stock from making “voluntary” PX14A6G filings to publicize their views on various proposals, notwithstanding that they may misleadingly suggest that the filing person is a significant shareholder.  Shareholders like that these notices, as with proxy materials filed in a traditional proxy contest, are posted on a registrant’s EDGAR page.  Thus, Chevedden’s Notice appears on the AES EDGAR page (see here) after the AES proxy statement and before a subsequent Form 8-K filed by the company. 

Notices of Exempt Solicitation can be confusing to shareholders and other stakeholders because the SEC does not require that they include a cover page containing information about the filer that clearly demonstrates that the Notice was not filed by the company (unlike with, for example, Schedule 13Gs and 13Ds).  Moreover, filers are not required to provide basic information in the Notice, such as what interest they may have in the matter they are soliciting on or their share ownership in the company (or even to demonstrate that they are, in fact, a shareholder).  Finally, it is unclear what practical and timely recourse a company would have for materially false and misleading statements that are included in Notices.  As a result, industry groups have requested in past years that the SEC staff limit these filings to shareholders relying on the Rule 14a-6(g) exemption and require that certain minimum disclosures be included.

In addition to the potential for shareholder confusion, the filing of these Notices may lead to increased press coverage of the filers’ views.  And now that Chevedden has EDGAR codes, there is a risk that he will start filing these types of letters regularly.  This is particularly notable since Chevedden frequently submits numerous short and cryptic responses to the SEC staff and companies regarding his shareholder proposals, and the SEC staff has permitted him to include language maligning individual directors and addressing entirely unrelated topics in supporting statements to his proposals.  Thus, in the future there may be a substantial increase in the use of Notices of Exempt Solicitation in connection with shareholder meetings.



18 February 2018

M&A Report: 2017 Mid-Year Activism Update

by Gibson Dunn

This Client Alert provides an update on shareholder activism activity involving NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion during the first half of 2017.  Activism has continued at a vigorous pace thus far in 2017.  As compared to the same period in 2016, this mid-year edition of Gibson Dunn’s Activism Update captured more public activist actions (59 vs. 45), more activist investors taking actions (41 vs. 35), and more companies targeted by such actions (50 vs. 38).

During the period from January 1, 2017 to June 30, 2017, seven of the 50 companies targeted faced advances from multiple activists, including two companies that each had three activists make separate demands and two companies that each dealt with activists acting jointly.  As for the activists, 10 of the 41 captured by our survey took action at multiple companies.  Equity market capitalizations of the target companies ranged from just above the $1 billion minimum covered by this survey to approximately $235 billion, as of June 30, 2017.

By the Numbers – H1 2017 Public Activism Trends

*Study covers selected activist campaigns involving NYSE and NASDAQ-traded companies with equity market capitalizations of greater than $1 billion as of June 30, 2017 (unless company is no longer listed).
**All data is derived from the data compiled from the campaigns studied for the 2017 Mid-Year Activism Update.

Additional statistical analyses may be found in the complete Activism Update linked below.

Activists continued to be most interested in changes to board composition, including gaining representation on the board (67.8% of campaigns), and changes to business strategy (61.0% of campaigns).  Goals related to M&A, including pushing for spin-offs and advocating both for and against sales or acquisitions, came up in 45.8% of the campaigns covered by our survey, while other governance initiatives (30.5% of campaigns) and changes in management (27.1% of campaigns) were relatively less common.  Interestingly, multiple activists approached companies not only seeking a change in management but with hand-picked replacements identified as part of their campaigns (e.g., Mantle Ridge at CSX Corp.).  Finally, while 20.3% of campaigns involved proxy solicitations during this past proxy season, none of the situations we cover involved attempts to take control of companies.  Of the 12 proxy solicitations we reviewed, four reached a shareholder vote but only one resulted in a dissident victory, despite ISS and Glass Lewis supporting the dissident slate in two of the votes in which companies prevailed.  We also note that, while activism continues to be most frequent at small-cap companies (46.0% of companies targeted had equity market capitalizations below $5 billion), the first half of 2017 saw a resurgence in activism at companies with equity market capitalizations greater than $20 billion, with 14 such companies targeted (28.0% of companies targeted), which is double the total number of such companies targeted in all of 2016.  More data and brief summaries of each of the activist actions captured by our survey follow in the first half of this publication.

The number of publicly filed settlement agreements reviewed for this edition of our Activism Update declined against the same period in 2016 (12 vs. 17).  The decline in publicly filed agreements despite the rise in overall campaigns may be attributable to an increased willingness of companies to adopt activist requests, sometimes even appointing activist director nominees, without reaching a formal agreement.  Within the settlement agreements we reviewed, the inclusion of certain key terms has appeared to become standard since we first started tracking such terms in 2014.  Standstill periods, voting agreements, and ownership thresholds each appear in at least 90% of agreements.  Non-disparagement provisions appear in 87% of agreements, while the inclusion of other strategic initiatives (e.g., replacement of management, spin-offs, governance changes) and committee appointments for new directors are somewhat less frequent, each appearing in just over 70% of agreements.  Reimbursement of expenses continues to appear only occasionally (36%).  Notably, the frequencies of each of the tracked terms in the 12 agreements reviewed for this edition did not materially differ from the respective average frequencies since 2014.  We delve further into the data and the details in the latter half of this edition of Gibson Dunn’s Activism Update.

Finally, we note the frequency and publicity of “activist shorts” in 2017.  Though different from a traditional activist campaign in that such shorts inherently come without warning, this different breed of activist is no less worthy of note to the companies they target.  Unlike many traditional activists who aim to increase shareholder value and stay in a company’s stock (sometimes even referring to themselves as “constructivists”), activist short-sellers are inherently disruptive.  The common practice is for an activist short-seller to take a short position in a company, then publicize, often in a white paper, what it feels are material vulnerabilities of the target company (e.g., overvaluation, misstated financials, industry weaknesses) and allow the market to react.  In the first half of 2017, within the same range of companies we survey for traditional activism (NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion), 22 different activist short-sellers (only two of which also took traditional activist actions at other companies) publicized short positions in 30 different companies (two of which were targeted by multiple activist short-sellers).

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26 December 2017

Proxy Advisory Firms: Policy Updates and Action Items for 2018 Annual Meetings 

by Gibson Dunn

The two most influential proxy advisory firms—Institutional Shareholder Services ("ISS") and Glass, Lewis & Co. ("Glass Lewis")—recently released their updated proxy voting guidelines for 2018.  The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments.  An executive summary of the ISS 2018 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here.  The 2018 Glass Lewis Guidelines are available here.


ISS 2018 Proxy Voting Policy Updates

On November 16, 2017, ISS updated its proxy voting guidelines for shareholder meetings held on or after February 1, 2018.  These updates impact ISS policies for the United States, Canada, the United Kingdom, Ireland, Europe, the Nordics Region, Japan, China, Hong Kong, and Singapore.  This client alert reviews the major U.S. policy updates in ISS's 2018 proxy voting guidelines, which are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies. 

ISS plans to issue a complete set of updated policies on its website in December 2017.  ISS also indicated that it plans to issue updated Frequently Asked Questions ("FAQs") on certain of its policies in December, and it has already issued a set of Preliminary FAQs on the U.S. Compensation Policies, which are available here.  In January 2018, ISS will evaluate new U.S. shareholder proposals that are anticipated for 2018 and update its voting guidelines as necessary.


Director Elections

Non-Employee Director Pay

ISS has adopted a new policy on "excessive" non-employee director pay, although the policy will not impact voting recommendations for 2018.  Under the policy, ISS will recommend votes "against" board or committee members responsible for approving or setting non-employee director compensation when there is a recurring pattern (which ISS defines as two or more consecutive years) of "excessive" pay without a compelling rationale or other mitigating factors to justify the compensation.  While ISS does not define what constitutes "excessive" pay, it notes that it has identified "cases of extreme outliers relative to peers and the broader market."

For 2018, ISS will continue to rely on its current policy to guide its vote recommendations.  Under this policy, patterns of excessive compensation may call into question directors' independence and result in ISS including cautionary language in its proxy analysis.  After 2018, negative voting recommendations would be triggered only after ISS identifies a pattern of excessive pay in consecutive years.

Pledging Company Stock

In prior years, ISS has addressed pledging of company stock through its "governance failures" policy.  Under this policy, ISS issued negative voting recommendations for members of the committee charged with risk oversight based on "significant" pledging of company stock.  For 2018, ISS has implemented an explicit policy on problematic pledging that reflects its current approach to this issue.  Under this policy, ISS recommends votes "against" the members of the committee responsible for overseeing pledge-related risks, or the full board, where a "significant" level of executive or director pledging raises concerns.  In making its voting recommendations, ISS will consider the following factors:

- the existence of an anti-pledging policy that prohibits future pledging activity and is disclosed in the proxy statement;

- the magnitude of pledged shares in the aggregate in terms of total common shares outstanding, market value, and trading volume;

- disclosure of the progress, or lack thereof, in reducing the magnitude of aggregate pledged shares over time;

- proxy statement disclosure that the shares subject to stock ownership and holding requirements do not include pledged company stock; and

- any other factors that are relevant. 

Board Diversity

ISS applies four fundamental principles when determining its votes for director nominees: accountability, responsiveness, composition, and independence.  ISS expanded its "composition" principle to include a specific statement about the benefits of boardroom diversity, which states that "[b]oards should be sufficiently diverse to ensure consideration of a wide range of perspectives."  In addition, ISS stated that it will not consider a lack of gender diversity in making voting recommendations, but it will highlight in its voting analysis if a board has no female directors. 

Poison Pills

ISS significantly updated its policy for poison pills in an effort both to simplify the policy and reinforce its views that shareholders should timely approve poison pills.   Under the updated policy, ISS will recommend votes "against" all board nominees, every year, at a company that has a "long-term" poison pill (a pill with a term greater than one year) that was not approved by shareholders.  This policy reflects several changes.   First, commitments to put a newly-adopted long-term poison pill to a vote at the following year's annual meeting will no longer be considered a mitigating factor that would exempt directors from negative voting recommendations.  Second, the frequency of adverse recommendations will increase.  Under its current policy, at companies with annual director elections, ISS only recommends "against" all board nominees every three years, while ISS will now recommend votes "against" all board nominees every year.  Third, companies with 10-year poison pills that were grandfathered into the current policy will no longer be grandfathered and will receive adverse voting recommendations.  According to ISS, this will impact about 90 companies.  With grandfathering gone, ISS has also removed its provisions for pills with deadhand and slowhand provisions since the few remaining deadhand/slowhand pills are not shareholder-approved and would be covered by the updated policy. 

ISS is maintaining its current policy for short-term poison pills (pills with a term of one year or less).  ISS will assess these on a case-by-case basis and focus its review on the company's rationale for adopting the poison pill (instead of its governance and track record), as well as other relevant factors such as a commitment to put any renewal to a vote. 

ISS's current policy on renewals and extensions of existing pills remains unchanged.  These will not receive case-by-case analysis, but rather, will result in adverse voting recommendations for all directors.


Shareholder Proposals

Gender Pay Gap

ISS adopted a new policy focused on shareholder proposals that target the gender pay gap by requesting reports from companies on either (i) their pay data, by gender, or (ii) their policies and goals aimed at reducing existing pay gaps (if any).  ISS did not previously have a policy on this issue, and the new policy is intended to provide more clarity about ISS's approach, given the expectation that the number of shareholder proposals on this subject will grow.  The new policy reflects a case-by-case approach to these proposals and will consider the following four factors:

- current company policies and disclosures regarding diversity and inclusion policies and practices;

- the company's compensation philosophy and its use of "fair and equitable compensation practices";

- any recent controversies, litigation or regulatory actions in which the company was involved related to gender pay gap issues; and

- any lag between the company and its peers with regard to reporting on gender pay gap policies or initiatives.

Climate Change Risk

ISS has also updated its policy on shareholder proposals relating to climate change risk, in light of recommendations from The Task Force on Climate-Related Financial Disclosures ("TCFD") that were finalized in 2017.  Under its current policy, ISS generally supports shareholder proposals asking that a company disclose information on the risks it faces related to climate change, and the policy provides examples of those risks.  According to ISS, the updated voting policy "better aligns" with the TCFD recommendations, which seek transparency around the roles of the board and management in assessing and managing climate-related risks and opportunities.  In this regard, the updated policy applies not only to shareholder proposals seeking disclosure about "financial, physical, or regulatory risks" that a company faces related to climate change, but also proposals addressing "how the company identifies, measures, and manages such risks." 


Executive Compensation             

Pay-for-Performance Analysis

Beginning in 2018, ISS will incorporate the Relative Financial Performance Assessment into its quantitative pay-for-performance analysis.  This metric compares a company's rankings to a peer group with respect to Chief Executive Officer ("CEO") compensation, and financial performance in three or four metrics, each as measured over three years.  The Preliminary FAQs on the U.S. Compensation Policies identify the metrics that ISS plans to use for each industry and how the metrics are weighted.  ISS intends to provide further specifics on the updated quantitative analysis in a white paper, but has indicated that the Relative Financial Performance Assessment would operate as a secondary quantitative screen that could move a company from "medium" to "low" concern or from "low" to "medium" concern.  The 2018 updates also clarify that the multiple of the CEO's total pay relative to the peer group median is measured over the most recent fiscal year, which is consistent with ISS's current policy.

Board Responsiveness to Advisory Votes on Executive Compensation

When a company receives support below 70% of votes cast on its last say-on-pay proposal, ISS will continue to make voting recommendations on a case-by-case basis the following year both for the say-on-pay proposal and the election of compensation committee members.  One of the elements that ISS currently considers is the board's response to investor concerns, including disclosure of engagement efforts with major institutional investors on the reasons for their low support of the proposal.  For 2018, ISS has expanded the factors it will consider in assessing whether the board's response to investor concerns was sufficiently robust.  In particular, ISS will consider disclosures about the timing and frequency of engagements with shareholders, and whether independent directors participated.  In this regard, the voting policy updates explicitly state that "[i]ndependent director participation is preferred."  ISS will also consider disclosure about specific concerns voiced by shareholders that voted against the say-on-pay proposal, as a way of assessing whether subsequent changes made by the company were in fact responsive to those concerns.  Finally, in addition to considering whether the company made any changes in response to shareholder concerns, ISS will also consider the nature of those changes and whether they were meaningful.


Other Changes

The voting policies also include the following updates:

- Director independence criteria:  ISS is changing its terminology on director classifications—from "inside" to "executive" and from "affiliated outside" to "non-independent non-executive."  In addition, directors who were previously considered "inside" directors due to ownership of more than 50% of a company's stock will be moved to the "non-independent non-executive" category.  According to ISS, this change is purely to standardize terminology across markets and will not impact voting recommendations.

- Attendance for newly appointed directors:  ISS is exempting new directors who have served for only part of the year from its attendance policy, under which it generally recommends votes "against" directors who attend less than 75% of meetings unless the proxy statement includes "an acceptable reason" for the absences.  Under the current policy, new directors are assessed case-by-case and disclosure about schedule conflicts is viewed as an acceptable reason for poor attendance because the meeting schedule would have been set before the director joined the board.  Under the updated policy, ISS will exempt new directors from the attendance policy, rather than expecting disclosure about scheduling conflicts. 

- Restrictions on shareholders' ability to amend the bylaws:  Under its current policies, ISS recommends votes "against" members of the nominating/governance committee if a company's charter places "undue" restrictions on shareholders' right to amend the company's bylaws.  These restrictions include prohibitions on the submission of binding shareholder proposals or ownership requirements in excess of those imposed by Rule 14a-8.  ISS has expanded this policy to address situations where a company's bylaws (or the charter) include these types of restrictions.


Glass Lewis 2018 Proxy Voting Policy Updates

On November 22, 2017, Glass Lewis released its updated proxy voting policy guidelines for 2018 in the United States and Canada and for shareholder proposals.  This client alert reviews the major updates to the U.S. guidelines, which provide a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on shareholder proposals.  The key changes in the 2018 guidelines are summarized below.


Board Diversity

Glass Lewis has added a new section to its voting guidelines on how it considers gender diversity on boards of directors.  Glass Lewis affirmed that, as in prior years, it will continue to review board composition closely, and it may note as a concern instances where it believes the board lacks diversity, including those boards that have no female directors.  For 2018, Glass Lewis will not make voting recommendations solely on the basis of a board's diversity, although this will be one of several factors Glass Lewis considers when evaluating a company's oversight structure.  This will change in 2019, however, when Glass Lewis will begin recommending votes "against" the nominating/governance committee chair at companies with no female directors.  In those instances, Glass Lewis may also recommend votes "against" other nominating/governance committee members as well, depending on factors such as the company's size, industry, and governance profile. 

The voting guidelines also state that Glass Lewis will "carefully review a company's disclosure of its diversity considerations" in making voting recommendations.  Glass Lewis may not recommend votes "against" directors when the board has provided a "sufficient rationale" for the absence of any female board members or there is disclosure of a plan to address the board's lack of diversity. 


Dual-Class Share Structures

Glass Lewis has also added a new section to its voting guidelines on how it will consider dual-class share structures—different classes of stock that may differ in voting or economic rights—in analyzing various aspects of a company's governance.  In this section, Glass Lewis explicitly states that dual-class voting structures "are typically not in the best interests of common shareholders" and that "[a]llowing one vote per share generally operates as a safeguard for common shareholders by ensuring that those who hold a significant minority of shares are able to weigh in on issues set forth by the board." 

Consistent with these principles, Glass Lewis "generally considers a dual-class share structure to reflect negatively on a company's overall corporate governance."  It will typically recommend that shareholders vote in favor of recapitalization proposals to eliminate dual-class share structures and "against" proposals to adopt a new class of common stock.

For companies that have done an IPO or spin-off in the past year, Glass Lewis has not changed its overall approach, which is that it generally refrains from making voting recommendations based on a company's governance practices for the first year the company is public.  However, Glass Lewis evaluates newly public companies to determine whether the rights of shareholders are being "severely restricted indefinitely" based on a list of factors and may recommend votes "against" directors where it determines this is the case.  The 2018 voting policy updates add the presence of a dual-class share structure to this list of factors. 

The discussion on dual-class share structures also addresses how Glass Lewis will assess board responsiveness to a significant shareholder vote (discussed in the next section).


Board Responsiveness to Significant Shareholder Votes

Under Glass Lewis's current policy on board responsiveness, Glass Lewis evaluates the board's response on a case-by-case basis in situations where 25% or more of a company's shareholders vote contrary to the company's recommendation on any proposal, including the election of director nominees, company proposals and shareholder proposals.  For 2018, Glass Lewis is reducing this threshold to 20%, because it believes a 20% threshold is significant enough to warrant consideration of board responsiveness, especially when a proposal addresses compensation or director elections.  Accordingly, when 20% or more of the votes cast (excluding abstentions and broker non-votes) on a proposal (including the election of directors) are contrary to management's recommendation, Glass Lewis will evaluate whether or not the board responded appropriately following the vote.  As under the current policy, the 20% threshold alone will not automatically generate a negative voting recommendation from Glass Lewis on director nominees or future proposals.  However, it may be a contributing factor to Glass Lewis's recommendation to oppose the board's voting recommendation. 

For companies with dual-class share structures,  Glass Lewis will review with care the approval or disapproval levels of shareholders that are unaffiliated with the company's controlling shareholders when making a determination as to whether board responsiveness is warranted.  Boards are expected to exhibit an "appropriate" level of responsiveness to voting results where a majority of unaffiliated shareholders either supported a shareholder proposal or opposed a company proposal.


Virtual Shareholder Meetings

Recognizing that the number of companies adopting virtual-only meetings is "small but growing," Glass Lewis has adopted a new policy on virtual meetings.  Glass Lewis considers virtual meeting technology "a useful complement" to in-person shareholder meetings because of its ability to expand the participation of shareholders that cannot attend those meetings in-person (resulting in a "hybrid meeting").  At the same time, Glass Lewis states that virtual-only meetings could curb shareholders' ability to have meaningful discussions with company management. 

In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company has chosen to hold a virtual-only meeting.  Instead, when analyzing the governance profiles of companies that hold virtual-only meetings, Glass Lewis will look for "robust" proxy statement disclosure that makes clear that shareholders will have the same ability to participate in the virtual-only meeting that they would have at an in-person meeting.  This policy will change in 2019.  Beginning in 2019, Glass Lewis will generally recommend votes "against" the members of the nominating/governance committee where the company intends to have a virtual-only shareholder meeting and fails to provide the disclosure described above.


Overboarded Directors

Glass Lewis did not change its director overboarding policy for 2018, but did clarify how the policy will apply to directors who are serving in executive roles but are not CEOs.  Under Glass Lewis's policy, it generally recommends a vote "against" (i) any director that serves as a public company executive officer while also serving on more than two total public company boards and (ii) any other director serving on more than five total public company boards. 

In determining whether to issue a negative voting recommendation, Glass Lewis considers whether service in excess of these limits may impact a director's ability to devote sufficient time to board duties based on a number of factors, such as the size and location of the other companies where the director serves on the board and the director's board duties at those companies.  For directors who are executives—but not CEOs—of public companies, the 2018 policy updates clarify that Glass Lewis will evaluate the specific duties and responsibilities of the executive's role. 


CEO Pay Ratio

Beginning in 2018, Glass Lewis's Proxy Paper reports will include a company's CEO pay ratio as an additional data point.  However, Glass Lewis notes in its 2018 voting policies that although the pay ratio can provide investors with more insight when assessing the pay practices at a company, pay ratio will not be a determinative factor in Glass Lewis's voting recommendations at this time.


Pay for Performance

Glass Lewis's pay-for-performance model, which ranks companies using a grade system of "A," "B," "C," "D," and "F," did not change this year and will continue to be used to guide Glass Lewis's evaluation of the effectiveness of compensation committees.  Where a company has a pattern of failing Glass Lewis's pay-for-performance analysis, Glass Lewis will generally recommend a vote "against" that company's compensation committee members.  The voting policy updates for 2018 provide clarification on the grading system by adding more detail on each of the grades.  Specifically:

- The letter "C" "does not indicate a significant lapse," but instead "identifies companies where the pay and performance percentile rankings relative to peers are generally aligned."  This suggests that a company does not overpay or underpay relative to its comparator group.

- The grades "A" and "B" are also given to companies that align pay with performance, but indicate lower compensation levels relative to the market and to company performance.  A "B" grade stems from slightly higher performance levels in comparison to market peers while executives earn relatively less than peers.  An "A" grade shows that a company is paying significantly less than peers while outperforming the comparator group.

- A grade of "D" or "F" reflects high pay and low performance relative to the comparator group, with a "D" reflecting a disconnect between pay and performance and an "F," a significant disconnect.  An "F" indicates that executives receive significantly higher compensation than peers while underperforming the market.


Shareholder Proposals

Climate Change

Glass Lewis has expanded its policy on shareholder proposals relating to climate change.  Glass Lewis will generally recommend "for" shareholder proposals seeking disclosure of information about climate change scenario analyses and other climate change-related considerations at companies in certain extractive or "energy-intensive" industries that have increased exposure to climate change-related risks.  Glass Lewis generally supports the disclosure recommendations of The Task Force on Climate-Related Financial Disclosure ("TCFD"), but will conduct a case-by-case review of proposals requesting that companies report in accordance with these recommendations.  When evaluating proposals asking for increased disclosure, Glass Lewis will evaluate:

- the industry in which a company operates;

- the company's current level of disclosure;

- the oversight afforded to issues related to climate change;

- the disclosure and oversight afforded to climate change-related issues at peer companies; and

- whether other companies in the company's market or industry have provided disclosure that is aligned with the TCFD's recommendations.

"Fix It" Proxy Access Shareholder Proposals

Glass Lewis has expanded its voting policy on proxy access shareholder proposals to address "fix it" proposals.  Shareholders have submitted "fix it" proposals to companies that already have proxy access in an effort to change specific terms of existing proxy access bylaws, such as the number of shareholders that can aggregate their shares to submit a proxy access nominee. 

Glass Lewis will evaluate these proposals on a case-by-case basis and will review a company's existing bylaws in order to determine whether they "unnecessarily restrict" shareholders' ability to use proxy access.  In cases where companies have adopted proxy access bylaws that "reasonably conform with broad market practice," Glass Lewis will generally oppose "fix it" proposals.  Where a company has "unnecessarily restrictive" provisions, Glass Lewis "may consider support for well-crafted 'fix it' proposals that directly address areas of the company's bylaws that [Glass Lewis] believe[s] warrant shareholder concern."

Dual-Class Share Structures

Glass Lewis has codified its position on shareholder proposals asking companies to eliminate their dual-class share structures and will generally recommend that shareholders vote "for" these proposals. 


Actions Public Companies Should Take Now

- Evaluate your company's practices in light of the revised ISS and Glass Lewis proxy voting guidelines:  Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2018, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies.  For example, companies should consider whether their non-employee director compensation has been previously deemed "excessive" by ISS and what mitigating factors or support can be provided to explain higher-than-average compensation in the 2018 proxy statement. 

- Consider enhancing your proxy disclosures on matters including board diversity and shareholder engagement:  Companies should consider whether there is additional information they can provide in the proxy statement to emphasize the diversity of the board, particularly with respect to gender and ethnicity.  Boards that have more work to do on diversity should be aware that this is likely to be a continued area of focus, not just for ISS and Glass Lewis but for institutional investors as well.  Regardless of the level of support a company received for its say-on-pay proposal, companies should evaluate their disclosures about shareholder engagement and consider whether they can say more about their engagements on executive compensation and on other matters.    

- Enroll in the Glass Lewis 2018 Issuer Data Report program:  Glass Lewis has not yet opened enrollment for its 2018 Issuer Data Report ("IDR") program.  Companies that have previously enrolled will be automatically notified when the 2018 enrollment period begins, but companies that have not enrolled may sign up for notifications regarding the open enrollment period here.  The IDR program enables public companies to access (for free) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual meetings.  Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for companies to confirm the accuracy of the data before Glass Lewis's voting recommendations are distributed to its clients.  Moreover, unlike ISS, Glass Lewis does not provide each company with complimentary access to the final voting recommendations for the company's annual meeting.  IDRs feature key data points used in Glass Lewis's corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others.  The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included.  Each participating public company receives its IDR approximately three weeks prior to its annual meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis.  Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis.  To learn more about the IDR program and sign up to receive a copy of the 2018 IDR for your company, go to https://www.meetyl.com/issuer_data_report.



10 December 2017

Black and Grey: The EU Publishes Its Lists of Tax Havens

by Gibson Dunn

On Tuesday, December 5, 2017, the EU announced its long-awaited list of seventeen "non-cooperative" tax jurisdictions (the "Black List") and identified a further 47 jurisdictions with whom discussions about tax reform are ongoing (the "Grey List").  The countries identified in both lists were among a number of jurisdictions invited by the EU to engage in a dialogue on tax governance issues in early 2017.  The Black List identifies jurisdictions that failed to engage in a meaningful dialogue with the EU or to take action to address deficiencies identified in their tax practices. The Grey List identifies jurisdictions whose tax policies and practices continue to present concerns but which have committed to address issues raised by the EU.

The origins of the list date back to a European Commission Recommendation from 2012, which was followed by detailed assessment work carried out since June 2015, pursuant to a published Commission action plan.

The EU has not announced any immediate steps to be taken against the blacklisted jurisdictions and instead has deferred to EU member states to take action.

The jurisdictions on the Black List are:

American Samoa   Marshall Islands   St Lucia  
Bahrain   Mongolia   Samoa  
Barbados   Namibia   South Korea  
Grenada   Palau   Trinidad & Tobago  
Guam   Panama   Tunisia  
Macau       United Arab Emirates  

In its announcement on December 5 the EU noted that these seventeen jurisdictions had "taken no meaningful action to effectively address the deficiencies [identified by the EU in relation to their tax legislation and policies] and do not engage in a meaningful dialogue…that could lead to…commitments" to resolve issues raised. The EU confirmed that the jurisdictions will remain on the Black List until they meet certain criteria it identified in a publication of November 8, 2016 in relation to tax transparency, fair taxation, and the implementation of the OECD Base Erosion and Profit Shifting (BEPS) package.

In addition the EU published a Grey List containing a total of 47 other jurisdictions, and identified one or more specific ongoing concerns in relation to each of those jurisdictions.

The jurisdictions on the Grey List are:

Armenia   Guernsey   Niue  
Aruba   Hong Kong   Oman  
Belize   Isle of Man   Peru  
Bermuda   Jamaica   Qatar  
Bosnia and Herzegovina   Jersey   Saint Vincent and Grenadines  
Botswana   Jordan   San Marino  
Cape Verde   Liechtenstein   Serbia  
Cayman Islands   Malaysia   Seychelles  
Cook Islands   Maldives   Swaziland  
Curaçao   Mauritius   Taiwan  
Faroe Islands   Montenegro   Thailand  
Fiji   Morocco   Turkey  
FYR Macedonia   Nauru   Uruguay  
Georgia   New Caledonia   Vanuatu  
Greenland       Vietnam  

In its conclusions on the Grey List the EU described these 47 jurisdictions as presenting concerns in relation to the criteria published on November 8, 2016 referred to above, and noted that it will continue to monitor the implementation of agreed steps to address the identified deficiencies. The stated purpose of the Grey List is therefore to act as a spur to continuing reform and progress in these jurisdictions.

Having expressed its sympathy for jurisdictions hit by the severe hurricanes in the Caribbean this year, the EU has put its screening process for eight Caribbean jurisdictions on hold.  These jurisdictions are: Anguilla, Antigua and Barbuda, Bahamas, British Virgin Islands, Dominica, Saint Kitts and Nevis, the Turks and Caicos Islands, and the United States Virgin Islands. Contacts with those jurisdictions will resume by February 2018, with the screening process in relation to those jurisdictions to be completed by the end of 2018.

While there is much to debate and dispute as to the allocation of jurisdictions to these lists, it should also be noted that the EU excluded from consideration EU member states themselves. This spares from consideration Gibraltar, as it is (pending BREXIT) formally part of the EU. After BREXIT there will be no bar to the United Kingdom or Gibraltar being considered for inclusion on either list.

In the run up to the publication of the lists, there was much speculation as to the sanctions and punishments that the EU would impose on jurisdictions included in the Black List. It had been suggested the EU could impose an EU-wide withholding tax on financial transfers into such jurisdictions, as well as a transfer tax on transfers out of those jurisdictions. While such measures may be adopted if the European Commission considers blacklisted jurisdictions to be continuing to be non-cooperative, in the short term the EU has decided to leave the question of the imposition of sanctions to the individual EU member states themselves.

This decision undercuts one of the stated purposes of the Black List – namely that of replacing the existing patchwork of national measures against non-cooperative jurisdictions with a coordinated approach by the EU. Nonetheless, inclusion on the Black List signals the EU's view that a particular jurisdiction fails to comply with tax good governance standards. This carries with it a measure of reputational damage for the jurisdictions in question vis-à-vis investors.

Clients and friends operating in the United Kingdom or in Europe may well have become familiar during the course of this year with the need to conduct a "risk assessment" for the purposes of complying with the EU's Fourth Money Laundering Directive (implemented in the United Kingdom, for example, by The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017). One of the risks to be assessed as part of such work is "geographic risk", with the assessing body required to take into consideration published views of international bodies. The publication of the Black List and Grey List should now be taken into account in the conduct, or periodic review, of that risk assessment. Those conducting risk assessments may need to consider the appropriateness of enhanced due diligence for entities incorporated in, doing business in, or with links to jurisdictions included on either list.

Clients and friends operating in the United Kingdom may also have completed, or be embarking on, a similar risk assessment under the United Kingdom's Criminal Finances Act 2017 regarding the "failure to prevent the facilitation of tax evasion" offences. Our recent  client alert on these offences can be found here. Again "geographic risk" forms part of such assessments. As in the AML sphere, best practice will be to take account of the EU's Black  List and Grey List in the conduct of, or periodic review of, such a risk assessment. Operations in these jurisdictions (especially those blacklisted) or work relating to these jurisdictions may require enhanced scrutiny as part of any risk assessment, and, where necessary, possibly enhanced controls or training as part of the implementation of "reasonable prevention procedures".

When it comes time to update a company's Bribery Act risk assessment, again the impact of these lists should be considered as part of that process.

Finally, it is worth noting that these designations are relevant only with respect to the EU. In the United States, for example, no such list has been proposed to date, and the imposition of sanctions by EU member states is not expected to have any direct US legal or tax consequences for entities from the blacklisted jurisdictions.

We will continue to monitor developments and will provide an update when the EU makes its decision in 2018 on eight outstanding Caribbean jurisdictions.



11 November 2017

SEC Staff Issues New Guidance on Shareholder Proposals

by Gibson Dunn

On November 1, 2017, the staff of the Securities and Exchange Commission (the "Staff") published Staff Legal Bulletin No. 14I (SLB 14I), available here, which sets forth additional Staff guidance on shareholder proposals submitted under SEC Rule 14a-8. 

SLB 14I addresses the Staff's views on four issues:

- the scope and application of Rule 14a-8(i)(7) (the "Ordinary Business Exception");

- the scope and application of Rule 14a-8(i)(5) (the "Economic Relevance Exception");

- proposals submitted on behalf of shareholders by third parties (so-called "Proposals by Proxy"); and

-the use of graphs and images consistent with Rule 14a-8(d). 

This alert provides an analysis of SLB 14I and highlights key considerations related to SLB 14I for public companies headed into the 2018 proxy season.

Summary of SLB 14I           

A.   Staff Guidance on the Ordinary Business Exception

The Ordinary Business Exception permits the exclusion of a shareholder proposal where "the proposal deals with a matter relating to the company's ordinary business operations."  The Securities and Exchange Commission ("Commission") has long stated that one of the reasons for this provision is to allow the exclusion of proposals addressing matters that are "fundamental to management's ability to run a company on a day-to-day basis" unless a proposal focuses on policy issues that are sufficiently significant because they transcend ordinary business and would be appropriate for a shareholder vote.  In this context, the Staff has long conducted a company-specific analysis that takes into account whether "a sufficient nexus exists between the nature of the proposal and the company."[1] 

Noting that some shareholder proposals present particularly difficult questions of whether the proposal focuses on a sufficiently significant policy issue in the context of a company's business, SLB 14I states that the company's board of directors, which has fiduciary duties to all shareholders, is well situated to analyze the implications of a particular proposal.  Accordingly, SLB 14I states that the Staff expects future no-action requests to include, if relevant, a discussion that reflects the board's "analysis of the particular policy issue raised and its significance," and believes that "explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned." 

The issue of whether a proposal raises a significant policy issue has long been one of the more difficult aspects of Rule 14a-8.  The Staff has long both taken a broad view of factors that it will take into account in assessing such matters and recognized distinctions in how a proposal may have different implications for different companies.  Thus, we view the call in SLB 14I for information on a board's perspective as consistent with the Staff's past administration of the rule, particularly as considerations such as the extent of media coverage have ceased to provide meaningful insight in our media-heavy society.  While SLB 14I is not entirely clear on the point, we understand that the board's analysis is not required in every no-action request where a company is seeking to rely on the Ordinary Business Exception, and will not necessarily be dispositive in cases where it is provided.  Instead, SLB 14I offers an additional avenue of analysis that companies should consider providing when addressing social or other policy considerations that are raised by a proposal.  In those contexts, a board's perspective on whether the specific actions called for under a proposal raise significant policy issues in the context of their company's specific operations will provide relevant additional context for the Staff's analysis.

B.   Staff Guidance on the Economic Relevance Exception

The Economic Relevance Exception permits exclusion of a shareholder proposal that relates to operations which (1) account for less than 5% of each of a company's total assets, net earnings and gross sales, and (2) are not otherwise significantly related to the company's business.  When the Commission amended this provision in 1983, it characterized the exemption as relating to proposals "concerning the functioning of the economic business of an issuer" and not to corporate governance matters such as "shareholders' rights."  By adopting the economic relationship tests set forth in the rule, the Commission sought to break from past interpretations that had denied exclusion of a proposal when it raised social or ethical issues without regard to the economic significance of such matters.  Notwithstanding that Commission action, the Staff's past interpretation of the "otherwise significantly related" prong of the Economic Relevance Exception has largely collapsed the administration of the Economic Relevance Exception with the Ordinary Business Exception, taking the position that a proposal would be deemed to be "significantly related" to a company's business if it raised significant policy issues.

In SLB 14I, the Staff announced that it will refocus on the language of the Economic Relevance Exception when administering the rule.  Thus, going forward, the Staff's focus in considering requests to exclude a shareholder proposal under the Economic Relevance Exception will be whether the proposal otherwise relates to operations that account for less than 5% of each of total assets, net earnings and gross sales.  SLB 14I notes that, under this framework, "proposals that raise issues of social or ethical significance may be included or excluded, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors" in the Economic Relevance Exception.  In applying this standard, the analysis of whether a proposal raises significant policy issues under the Ordinary Business Exception will no longer be conflated with or germane to the Economic Relevance Exception.  Instead, the Staff notes that a shareholder may be able to avoid exclusion by demonstrating other economic significance of the proposal to the specific company, such as demonstrating that the proposal has "a significant impact on other segments of the issuer's business or subject[s] the issuer to significant contingent liabilities."  The Staff notes that social or ethical issues may continue to be relevant, but "[t]he mere possibility of reputational or economic harm will not preclude no-action relief."  In contrast, corporate governance proposals generally will not be excludable under the Economic Relevance Exception. 

As with the Ordinary Business Exception, SLB 14I notes that a company's board is well positioned to determine whether a particular proposal is "otherwise significantly related to the company's business."  Accordingly, the Staff again states that a company's request under the Economic Relevance Exception should include, if relevant, a discussion that reflects the board's analysis of the proposal's significance to the company, and as in its discussion of the Ordinary Business Exception, further notes that an "explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned." 

C.   Staff Guidance on Proposals by Proxy

Rule 14a-8 does not address the submission of proposals by non-shareholders, and states that "The references [in Rule 14a-8] to 'you' are to a shareholder seeking to submit the proposal."  Accordingly, Rule 14a-8 does not explicitly address a third party's ability to submit proposals on behalf of a shareholder, a process frequently referred to as Proposals by Proxy.  In SLB 14I, the Staff reaffirms its position that a shareholder's submission of a proposal by proxy is permissible as long as the submission is consistent with Rule 14a-8. 

As Proposals by Proxy have increased in recent years, there have been numerous instances where the shareholder's involvement with the shareholder proposal was at best tenuous.[2]  Recognizing that Proposals by Proxy raise concerns as to whether a shareholder truly stands behind a proposal and whether the eligibility requirements of Rule 14a-8 are satisfied, the Staff in SLB 14I has addressed the documentation that a shareholder should provide to document its delegation of authority to submit a proposal. 

Under SLB 14I, shareholders who submit Proposals by Proxy will be expected to provide documentation to:

- identify the shareholder-proponent and the person or entity selected as the proxy;

- identify the company to which the proposal is directed;

- identify the annual or special meeting for which the proposal is submitted;

- identify the specific proposal to be submitted (e.g., proposal to lower the threshold for calling a special meeting from 25% to 10%); and

- be signed and dated by the shareholder.

The Staff's guidance in this regard applies only to proposals submitted by proxy after November 1, 2017, the date SLB 14I was published.  When a shareholder has not provided such documentation, a company will need to provide a timely deficiency notice that specifically identifies the defects with the shareholder's submission.  If a shareholder fails to correct the defects within the 14-day time period established under Rule 14a-8, the proposal may be excludable. 

D.   Staff Guidance on Graphs and Images in Shareholder Proposals

Rule 14a-8(d) is a procedural basis for exclusion of shareholder proposals, and provides that a "proposal, including any accompanying supporting statement, may not exceed 500 words."  In recent years, the Staff has conflated the issue of whether Rule 14a-8(d) prohibits the inclusion of graphs and/or images in proposals with the fact that the rule was designed to limit the amount of space a shareholder proposal may occupy in a company's proxy statement.  Accordingly, the Staff has not concurred that proposals containing images or graphics in addition to words can be excluded.[3]

Recognizing the potential for abuse in this context, the Staff believes that Rule 14a-8(i)(3) can address these issues.  In SLB 14I, the Staff notes that graphs and/or images can be excluded under Rule 14a-8(i)(3) if they:

- make the proposal materially false or misleading;

- render the proposal so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing it, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires;

- directly or indirectly impugn character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; or

- are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.

While the Staff's reaffirmation that images and graphics remain subject to the substantive bases for exclusion under Rule 14a-8, SLB 14I stops short of addressing the key issue of how a graphic or image is to be evaluated under the objective 500-word procedural standard of the rule.  Instead, SLB 14I notes only that exclusion of a proposal would also be appropriate under Rule 14a-8(d) if the total number of words, including words in the graphics, exceeds 500.  As well, SLB 14I addresses only the exclusion of an image or graphic, and does not address when the inclusion of an image or graphic will justify exclusion of the entire proposal. 

The Staff further indicates that "companies should not minimize or otherwise diminish the appearance of a shareholder's graphic," and gives two examples of how graphics should be treated in a company's proxy statement: 

- if the company includes its own graphics in its proxy statement, it should give similar prominence to a shareholder's graphics; and

- if a company's proxy statement appears in black and white, the shareholder proposal and accompanying graphics may also appear in black and white.

Considerations for 2018 Proxy Season

Below are some considerations for companies in assessing the Staff guidance.

- While SLB 14I calls for analysis from a company's board of directors, it is unclear on how it will evaluate determinations made by board committees.  In recent years, many boards have delegated authority to consider shareholder proposals on various topics to relevant board committees, such as a governance committee or a sustainability committee in the case of proposals involving environmental and social issues, and the compensation committee in the case of executive compensation-related proposals.  Given that boards routinely delegate responsibilities to committees (and indeed, are required to do so under stock exchange listing standards), we believe the Staff should be comfortable relying on the analysis of a board committee.  However, pending further guidance or precedent on this aspect of SLB 14I, companies may wish to consider having an appropriate board committee conduct an initial analysis and bringing the analysis to the full board for its review and discussion.  

- Companies seeking to rely on arguments under the Ordinary Business Exception and/or the Economic Relevance Exception that are supported by input from the board of directors will need to review their board calendars and determine whether the board is scheduled to meet in advance of the company's deadline for filing a no-action request with the SEC.  If it is not feasible for the board to meet prior to the deadline, companies could consider filing the initial request and then submitting a supplemental letter that includes the board analysis.  Additionally, as SLB 14I indicates that a no-action request relying on either of these exceptions should "detail the specific processes by the board to ensure that its conclusions are well-informed and well-reasoned," when planning the board's agenda it will also be necessary to accommodate the specific processes that are appropriate for the board to analyze the implications of a proposal.

- Companies applying SLB 14I's guidance to the Ordinary Business Exception and/or the Economic Relevance Exception should consider how the board's analysis will be received by various stakeholders.  For example, while reputational considerations may not block exclusion of a proposal under the Economic Relevance Exception, it may still be a factor to take into account in determining whether to seek exclusion of a shareholder proposal.  In this respect, it may often be helpful to carefully focus a no-action request on the specifics of a particular proposal as it relates to the company and to distinguish that from broader societal concerns that a proposal may touch upon.

- While SLB 14I sets forth the Staff's views, both the Ordinary Business Exception and the Economic Relevance Exception have been the subject of litigation, and it remains possible that some shareholder proponents may seek judicial review of the applicability of those exclusions involving the analysis described in SLB 14I.

- Companies will need to address insufficient documentation of Proposals by Proxy in the deficiency notice sent within 14 days of receiving the proposal in order to preserve the argument for a procedural no-action request.

Overall, SLB 14I provides important guidance for companies as well as for shareholder proponents on the Staff's administration of the rule.  Nevertheless, the shareholder proposal process remains under intense scrutiny, and there remain calls for the Commission to take further action on the rule.  For example, on November 8, 2017, Chairman Jay Clayton remarked that "[q]uestions exist about the appropriate level of ownership that should be required to submit shareholder proposals, as well as whether our current resubmission thresholds are too low."[4]

[1]        Staff Legal Bulletin No. 14E (Oct. 27, 2009). 

[2]       See Baker Hughes Inc. (avail. Feb. 22, 2016); Chevron Corp. (avail. Mar. 11, 2014, recon. denied Apr. 4, 2014).

[3]        See General Electric Co. (avail. Feb. 3, 2017, recon. granted Feb. 23, 2017); General Electric Co. (avail. Feb. 23, 2016).

[4]        See "Remarks at the PLI 49th Annual Institute on Securities Regulation: Governance and Transparency at the Commission and in our Markets", available at https://www.sec.gov/news/speech/speech-clayton-2017-11-08.


18 August 2017

2017 Mid-Year Activism update

by Gibson Dunn

This Client Alert provides an update on shareholder activism activity involving NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion during the first half of 2017.  Activism has continued at a vigorous pace thus far in 2017.  As compared to the same period in 2016, this mid-year edition of Gibson Dunn's Activism Update captured more public activist actions (59 vs. 45), more activist investors taking actions (41 vs. 35), and more companies targeted by such actions (50 vs. 38). 

During the period from January 1, 2017 to June 30, 2017, seven of the 50 companies targeted faced advances from multiple activists, including two companies that each had three activists make separate demands and two companies that each dealt with activists acting jointly.  As for the activists, 10 of the 41 captured by our survey took action at multiple companies.  Equity market capitalizations of the target companies ranged from just above the $1 billion minimum covered by this survey to approximately $235 billion, as of June 30, 2017. 

Activists continued to be most interested in changes to board composition, including gaining representation on the board (67.8% of campaigns), and changes to business strategy (61.0% of campaigns).  Goals related to M&A, including pushing for spin-offs and advocating both for and against sales or acquisitions, came up in 45.8% of the campaigns covered by our survey, while other governance initiatives (30.5% of campaigns) and changes in management (27.1% of campaigns) were relatively less common.  Interestingly, multiple activists approached companies not only seeking a change in management but with hand-picked replacements identified as part of their campaigns (e.g., Mantle Ridge at CSX Corp.).  Finally, while 20.3% of campaigns involved proxy solicitations during this past proxy season, none of the situations we cover involved attempts to take control of companies.  Of the 12 proxy solicitations we reviewed, four reached a shareholder vote but only one resulted in a dissident victory, despite ISS and Glass Lewis supporting the dissident slate in two of the votes in which companies prevailed.  We also note that, while activism continues to be most frequent at small-cap companies (46.0% of companies targeted had equity market capitalizations below $5 billion), the first half of 2017 saw a resurgence in activism at companies with equity market capitalizations greater than $20 billion, with 14 such companies targeted (28.0% of companies targeted), which is double the total number of such companies targeted in all of 2016.  More data and brief summaries of each of the activist actions captured by our survey follow in the first half of this publication.

The number of publicly filed settlement agreements reviewed for this edition of our Activism Update declined against the same period in 2016 (12 vs. 17).  The decline in publicly filed agreements despite the rise in overall campaigns may be attributable to an increased willingness of companies to adopt activist requests, sometimes even appointing activist director nominees, without reaching a formal agreement.  Within the settlement agreements we reviewed, the inclusion of certain key terms has appeared to become standard since we first started tracking such terms in 2014.  Standstill periods, voting agreements, and ownership thresholds each appear in at least 90% of agreements.  Non-disparagement provisions appear in 87% of agreements, while the inclusion of other strategic initiatives (e.g., replacement of management, spin-offs, governance changes) and committee appointments for new directors are somewhat less frequent, each appearing in just over 70% of agreements.  Reimbursement of expenses continues to appear only occasionally (36%).  Notably, the frequencies of each of the tracked terms in the 12 agreements reviewed for this edition did not materially differ from the respective average frequencies since 2014.  We delve further into the data and the details in the latter half of this edition of Gibson Dunn's Activism Update.

Finally, we note the frequency and publicity of "activist shorts" in 2017.  Though different from a traditional activist campaign in that such shorts inherently come without warning, this different breed of activist is no less worthy of note to the companies they target.  Unlike many traditional activists who aim to increase shareholder value and stay in a company's stock (sometimes even referring to themselves as "constructivists"), activist short-sellers are inherently disruptive.  The common practice is for an activist short-seller to take a short position in a company, then publicize, often in a white paper, what it feels are material vulnerabilities of the target company (e.g., overvaluation, misstated financials, industry weaknesses) and allow the market to react.  In the first half of 2017, within the same range of companies we survey for traditional activism (NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion), 22 different activist short-sellers (only two of which also took traditional activist actions at other companies) publicized short positions in 30 different companies (two of which were targeted by multiple activist short-sellers).



12 August 2017

Reforming Regulatory Reform: What to Expect from the New Leaders at the Financial Regulatory Agencies

by Gibson Dunn

After a slow start, senior policymakers are moving forward to lead the U.S. federal financial regulatory agencies. The Senate has confirmed the Chairs of both the Commodity Futures Trading Commission and the Securities and Exchange Commission, J. Christopher Giancarlo and Jay Clayton. The Senate Banking Committee has held hearings on the Administration’s nominees for Federal Reserve Board Vice Chairman for Bank Supervision, Randal Quarles, and Comptroller of the Currency, Joseph Otting. Just recently, the OCC officially sought public input on the Volcker Rule, and the Federal Reserve Board published a proposal for public comment on enhancing bank corporate governance.

With the approach of fall, the ability of the Trump Administration to mold financial regulation to its priorities should increase. Our panelists from the Gibson Dunn Financial Institutions and Securities Regulation and Corporate Governance Practice Groups will discuss the likely priorities of the new regulatory leaders, areas where the agencies may act independently of congressional action, and how reform is likely to affect corporate governance, disclosure requirements, the scope of bank regulation, and the derivatives markets.


18 July 2017

SEC Chairman Jay Clayton Delivers First Public Remarks Since Confirmation

In his first public speech since being confirmed as Chairman of the U.S. Securities and Exchange Commission (“SEC” or “the Commission”), Jay Clayton addressed the Economic Club of New York on July 12, 2017.  In his remarks, available here, Chairman Clayton discussed his vision of the principles that should guide the Commission and opportunities to apply those principles in practice.

Guiding PrinciplesChairman Clayton laid out eight principles to guide his tenure as SEC Chairman, including:

(1)   Analysis of Long-Term and Cumulative Effects of Small Regulatory Changes.  Incremental regulatory changes can have long lasting, dramatic impacts on markets and should be analyzed cumulatively, in addition to incrementally.  The increased attractiveness of private sources of funding and markets for certain companies may be linked to these requirements.

(2)   Evolution of the SEC Alongside Changing Markets.  The Commission must evolve with the market, including utilizing technology to find new ways of analyzing regulatory filings and detecting suspicious activity.  However, such advances should be balanced against the costs companies incur to comply with new regulatory changes.

(3)   Retrospective Review of Adopted Rules.  The SEC should regularly review its rules retrospectively to determine where rules are, or are not, functioning as intended.

(4)   Consideration of Costs of Compliance.  The Commission must write rules in a clear manner, with a vision in mind for how those rules will be implemented, recognizing implementation costs that are likely to arise. Principles in PracticeChairman Clayton additionally explained how he expects to put these principles into practice, including:

(a)   Enforcement and Examinations; Cyber Risks.  In addition to emphasizing that the SEC “intend[s] to continue deploying significant resources to root out fraud and shady practices in the markets,” Chairman Clayton also noted that public companies have an obligation to disclose material information about cyber risks.  He acknowledged that the SEC must be cautious about punishing companies that are victimized by cyber-attacks.  Chairman Clayton went on to explain that the Commission must take a broad view and bring proportionality to its analysis of cybersecurity which affects investors, companies, markets, and national security.

(b)   Capital Formation.  Chairman Clayton expressed concern about the number of large companies opting to remain private, believing that the Commission needs to increase the allure of the public capital markets.  He cited the implementation of the JOBS Act on‑ramp for emerging growth companies (“EGCs”) as a recent success story.  Chairman Clayton acknowledged that the Commission recently expanded the approach of the JOBS Act by adopting a non-public review process for draft registration statements of companies that do not qualify as EGCs, as discussed in more detail here.  He also encouraged companies to reach out to the SEC Staff with respect to waiver requests under Rule 3-13 of Regulation S-X from reporting rules that may “require publicly traded companies to make disclosures that are burdensome to generate, but may not be material to the total mix of information available to investors.”


While the principles outlined above do not necessarily signal a dramatic shift in policy for the SEC, they reinforce prior indications that the Commission under Chairman Clayton will increasingly focus on encouraging capital formation and may be willing to explore ways to curtail existing regulatory burdens that may serve to hamper capital formation.

Special thanks to Nick Dumont in New York and Victor Twu and Matt Haskell in Orange County for their summary of Jay Clayton's speech.



3 July 2017

Shareholder Proposal Developments During the 2017 Proxy Season 

by Gibson Dunn

This client alert provides an overview of shareholder proposals submitted to public companies for 2017 shareholder meetings, including statistics and notable decisions from the staff (the "Staff") of the Securities and Exchange Commission (the "SEC") on no-action requests.[1]

I.    Shareholder Proposal Statistics and Voting Results[2]

        A.    Shareholder Proposals Submitted

        1.    Overview

For 2017 shareholder meetings, shareholders have submitted approximately 827 proposals, which is significantly less than the 916 proposals submitted for 2016 shareholder meetings and the 943 proposals submitted for 2015 shareholder meetings.

For 2017, across four broad categories of shareholder proposals—governance and shareholder rights; environmental and social issues; executive compensation; and corporate civic engagement[3]—the most frequently submitted were environmental and social proposals (with approximately 345 proposals submitted).

The number of social proposals submitted to companies increased to approximately 201 proposals during the 2017 proxy season (up from 160 in 2016).  Thirty-five social proposals submitted in 2017 focused on board diversity (up from 28 in 2016), 34 proposals focused on discrimination or diversity-related issues (up from 16 in 2016), and 19 proposals focused on the gender pay gap (up from 13 in 2016).

Environmental proposals were also popular during the 2017 proxy season, with 144 proposals submitted (up from 139 in 2016).  Furthermore, there was an unprecedented level of shareholder support for environmental proposals this proxy season, with three climate change proposals receiving majority support and climate change proposals averaging support of 32.6% of votes cast.  This compares to one climate change proposal receiving majority support in 2016 and climate change proposals averaging support of 24.2% of votes cast.  As further discussed below, the success of these proposals is at least in part due to the shift in approach towards environmental proposals by certain institutional investors, including BlackRock, Vanguard and Fidelity. 

        2.    Types of Shareholder Proposals

The most common types[4] of shareholder proposals in 2017, along with the approximate numbers of proposals submitted, were:

  • social (201 proposals);
  • environmental (144 proposals, including 69 climate change proposals);
  • proxy access (112 proposals); and
  • political contributions and lobbying disclosure (87 proposals).

By way of comparison, the most common types of shareholder proposals in 2016 were:

  • proxy access (201 proposals);
  • social (160 proposals);
  • environmental (139 proposals, including 63 climate change proposals); and
  • political contributions and lobbying disclosure (91 proposals).

        3.    Proponents

As is typically the case, John Chevedden and shareholders associated with him (including James McRitchie, Kenneth and William Steiner, and Myra Young) submitted by far the highest number of shareholder proposals for 2017 shareholder meetings—approximately 203, which is 24.5% of all shareholder proposals submitted to date in 2017.   Other proponents reported to have submitted or co-filed at least 20 proposals each include: As You Sow Foundation (48, largely focused on environmental matters); Trillium Asset Management (42, largely focused on environmental matters); the New York City Comptroller (39, largely focused on governance/shareholder rights and environmental matters); Walden Asset Management (23, largely focused on environmental and political matters); Mercy Investment Services (21, largely focused on environmental and social matters); the New York State Common Retirement Fund (25, largely focused on political matters); and NorthStar Asset Management (20, largely focused on social matters).

        B.    Shareholder Proposal No-Action Requests

        1.    Overview

During the 2017 proxy season, companies submitted 288 no-action requests to the Staff as compared to approximately 245 during the 2016 proxy season.  In 2017, the percentage of no-action requests that were granted by the Staff increased to 78%, the highest level in at least four years. The following table summarizes the responses to no-action requests that the Staff issued during the 2017 and 2016 proxy seasons:




Total no-action requests submitted



Total Staff responses issued[5]



          No-action requests withdrawn



          Responses granting or denying exclusion



                     Exclusions granted

189 (78.0%)

143 (67.8%)

                     Exclusions denied

53 (22.0%)

68 (32.2%)

        2.    Reasons for Exclusion in 2017

Based on a review of no-action letters issued during the 2017 proxy season, the Staff concurred that shareholder proposals could be excluded for the following principal reasons:[6]

  • 37.6% based on ordinary business arguments;
  • 32.8% because the company had substantially implemented the proposal; and
  • 17.5% based on procedural arguments, such as timeliness or defects in the proponent's proof of ownership.

Of the shareholder proposals for which no-action relief was denied, 47.2% were challenged as being related to the company's ordinary business operations under Rule 14a-8(i)(7), making ordinary business the most common basis for denial as well as success for a no-action request. Other frequently unsuccessful arguments included that the proposal was vague or false and misleading (45.3% of denials), that the company had substantially implemented the proposal (30.2% of denials), and that there was a procedural defect in the submission of the proposal (17.0% of denials).

Three aspects of the foregoing data are worth noting:

  • The success during 2017 of ordinary business arguments, with 37.6% of no-action requests granted on that basis, up from 32.2% in 2016.
  • The continued success of substantial implementation arguments. This marks the second straight year in which approximately one-third of all no-action requests were granted because the Staff concurred that the company had substantially implemented the proposal.  During the 2017 proxy season, 32.8% of such no-action requests were granted, down slightly from 34.3% in 2016 but up from 21.0% in 2015.
  • The continued decrease in exclusions based on procedural arguments, with 17.5% of no-action requests granted on that basis in 2017, down from 23.1% in 2016 and 35.0% in 2015.

                    a)    Increase in Exclusions Based on Ordinary Business

Several new types of shareholder proposals were excluded based on ordinary business arguments during the 2017 proxy season, including proposals relating to (i) requests for reports on human lead exposure; (ii) a new version of minimum wage reform proposals; (iii) a new type of pharmaceutical pricing proposals; and (iv) a report on certain religious freedom principles.  In addition, the Staff agreed that certain environmental and social proposals were excludable on ordinary business grounds because the proposals sought to "micromanage" the company, as further described below.

                    i.    Requests for Reports on Human Lead Exposure

During the 2017 proxy season, at least two companies received what appears to be a new type of environmental proposal.  Specifically, The Home Depot, Inc. and Lowe's Companies, Inc. each received a shareholder proposal asking them to "issue a report, at reasonable expense and excluding proprietary and privileged information, on the risks and opportunities that the issue of human lead exposures from unsafe practices poses to the company, its employees, contractors, and customers."  The supporting statement mentioned that companies should consider improving their lead safety practices through "consumer education on lead-safe practices, free or discounted lead testing products, and dedicated lead safety personnel." 

While proposals that focus on the adverse effects on the environment and/or public health are typically not excludable, both companies submitted no-action requests to the Staff arguing that this particular proposal was excludable because (1) the supporting statements made it clear that it related to ordinary business matters, namely, the products and services that these companies offer to their customers, and (2) the proposal did not otherwise focus on a significant policy issue.[7] 

Ultimately, the proposal submitted to The Home Depot, Inc. was withdrawn, and the Staff granted the no‑action request submitted by Lowe's Companies, Inc. While the Staff did not provide any additional insight into its decision, the Lowe's decision confirms the well-established principle that proposals relating to both ordinary business matters and social policy issues may be excludable.

                   ii.    Minimum Wage Shareholder Proposals

This proposal, which asks companies to adopt principles for minimum wage reform, is similar to the proposals submitted by Trillium Asset Management and several religious orders in 2016, with one important distinction described below.

Specifically, last year, five of the six submitted proposals were successfully challenged under Rule 14a-8(i)(7) as relating to the companies' ordinary business operations (specifically, general compensation matters).[8] Seeking to avoid exclusion on ordinary business grounds this year, the proponents (Trillium Asset Management and Zevin Asset Management) revised the proposal to include a specific disclaimer regarding general compensation matters by stating that the proposal did not "seek to address the [c]ompany's internal approach to compensation, general employee compensation matters, or implementation of its principles for minimum wage reform" and giving the board discretion to determine the appropriate timing for publishing the principles.

Five companies that received the proposal this year (including The TJX Companies, Inc. and Chipotle Mexican Grill, Inc., both of which received a minimum wage proposal last year as well) submitted no-action requests to the Staff arguing, among other things, that the proposals were excludable on ordinary business grounds (as relating to general compensation matters) with some letters explicitly noting that the issue of minimum wage is not a significant policy issue and that the Staff has never viewed it as such.[9] The no-action requests also maintained that, in spite of the proponent's disclaimer, the supporting statement still addressed the wage practices (i.e., general compensation matters) of each company that received the proposal.

The Staff agreed that the proposal could be excluded on ordinary business grounds, noting that the proposal "relates to general compensation matters, and does not otherwise transcend day-to-day business matters."[10]

                    iii.   Pharmaceutical Pricing Proposals

This season saw the return of a shareholder proposal campaign targeting how pharmaceutical companies determine the price of their products.  At least ten pharmaceutical companies received proposals requesting that the board "issue a report listing the rates of price increases year-to-year of the company's top ten selling branded prescription drugs between 2010 and 2016, including the rationale and criteria used for these price increases, and an assessment of the legislative, regulatory, reputational and financial risks they represent for the company."  The last campaign that similarly focused on the pricing of pharmaceutical products asked companies during the 2015 proxy season to prepare reports "on the risks to [the companies] from rising pressure to contain U.S. specialty drug prices."  Those proposals were found to be not excludable under Rule 14a-8(i)(7) by the Staff because they focused on "fundamental business strategy with respect to . . . [companies'] pricing policies for pharmaceutical products."[11]

During the 2017 proxy season, the 10 companies that received this new drug pricing-related proposal sought no‑action relief under Rule 14a-8(i)(7), with many arguing that this proposal was different from the 2015 adverse precedents because in those instances, the proposals "focused on the company's fundamental business strategy with respect to its pricing policies for pharmaceutical products rather than on how and why the company makes specific pricing decisions regarding certain of those products."  The companies also argued that "[u]nlike the requests in [2015], the primary focus of the [current proposals] . . . is on obtaining explanation and justification for product-specific and time period-specific price increases."  Most of the proponents, on the other hand, cited those same 2015 letters and argued that they stood for the proposition that "[i]t is abundantly clear that the pricing of their drugs . . . is a significant policy concern for drug manufacturers."  The Staff concurred that the proposals were excludable on ordinary business grounds because they related "to the rationale and criteria for price increases of the company's top ten selling branded prescription drugs in the last six years."[12]

                    iv.    Report on Certain Religious Freedom Principles

During the 2017 proxy season, the National Center for Public Policy Research and its leaders submitted a new type of proposal to at least eight companies asking them to produce a report (1) detailing risks and costs associated with pressure campaigns to oppose religious freedom laws, public accommodation laws, freedom of conscience laws and campaigns against candidates from Title IX exempt institutions, (2) detailing risks and costs associated with pressure campaigns supporting discrimination against religious individuals and those with deeply held beliefs, and (3) detailing strategies that they may deploy to defend their employees and their families against discrimination and harassment that is encouraged or enabled by such efforts.  

While the proposals were framed as asking for a "[r]eport on certain non-discrimination principles," eight companies sought no-action relief on ordinary business grounds as relating to management of workforce and/or public relations.  The Staff concurred in the exclusion of five of these proposals under Rule 14a-8(i)(7), as relating to companies' ordinary business operations.[13]  These no-action letters demonstrate that merely labeling a proposal as implicating discrimination issues is not sufficient to avoid evaluation of whether a proposal seeks to address ordinary business operations.

                   v.    Micromanagement Exclusions

During the 2017 proxy season, some companies were also able to exclude proposals on ordinary business grounds because they impermissibly sought to "micromanage" the company.  These letters are notable because the Staff has rarely concurred with no-action requests based on the micromanagement prong of the ordinary business exception.  For example, Deere & Co. and another company were able to exclude on ordinary business grounds a proposal requesting that the company "generate a feasible plan for the company to reach a net-zero GHG emissions status by the year 2030 . . . and report the plan to shareholders" because, according to the Staff, the proposal sought to "micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment."[14]

                   b)    Continued Success in Exclusions Based on Substantial Implementation

While substantial implementation continued to be a popular basis for exclusion during the 2017 proxy season, 54.8% of the no-action requests granted on this basis concerned "amend proxy access" proposals, as further discussed below.  Overall, approximately 34 companies were able to exclude "amend proxy access" proposals based on arguments that the existing terms of their proxy access bylaws substantially implemented the proposal.[15]  As further discussed below, an additional 13 companies were able to exclude "adopt proxy access" proposals on the basis of substantial implementation arguments because of their adoption of a proxy access bylaw prior to their annual meetings.

                   c)    Decrease in Exclusions Based on Procedural Arguments

As noted above, the number of exclusions based on procedural arguments continued to decrease in 2017, with 17.5%[16] of no-action requests (or 33 of 189) granted on that basis in 2017, down from 23.2% in 2016 (or 33 of 142) and 35.0% in 2015 (or 46 of 133).  The most common procedural argument that failed to obtain no-action relief in 2017 was based on the one-proposal limitation.  Under Rule 14a-8(c), each shareholder may submit no more than one proposal to a company for a particular shareholders' meeting. All seven no-action requests asserting that a submission violated the one-proposal rule did not prevail on this argument

        C.    Shareholder Proposal Voting Results[17]

Based on the 331 shareholder proposals for which ISS provided voting results in 2017, proposals averaged support of 29.0% of votes cast, slightly down from average support of 29.8% of votes cast in 2016.  The proposal topics that received high shareholder support, including four categories of proposals that averaged majority support, were:

  • Board Declassification: Three proposals voted on averaged support of 70.2% of votes cast in 2017, compared to three proposals with average support of 64.5% in 2016;
  • Elimination of Supermajority Voting Requirements: Seven proposals voted on averaged support of 64.3% of votes cast, compared to 13 proposals with average support of 59.6% in 2016;
  • Adopt Proxy Access:  Eighteen adopt proxy access proposals voted on averaged support of 62.1% of votes cast. In 2016, average support for proxy access proposals where the company had not previously adopted some form of proxy access was 56.0%.
  • Majority Voting in Uncontested Director Elections: Seven proposals voted on averaged support of 62.3% of votes cast, compared to 10 proposals with average support of 74.2% in 2016;
  • Written Consent: Twelve proposals voted on averaged support of 45.6% of votes cast, compared to 13 proposals with average support of 43.4% in 2016;
  • Shareholder Ability to Call Special Meetings: Fifteen proposals voted on averaged support of 42.9% of votes cast, compared to 16 proposals with average support of 39.6% in 2016; and
  • Climate Change: Twenty-eight proposals voted on averaged support of 32.6% of votes cast, compared to 37 proposals with average support of 24.2% in 2016.

Overall, approximately 10.9% of shareholder proposals that were voted on at 2017 shareholder meetings received support from a majority of votes cast, compared to 14.5% of proposals in 2016.  The table below shows the principal topics addressed in proposals that received majority support:


2017 Majority Votes

2016 Majority Votes

Adopt proxy access



Elimination of supermajority vote requirements



Majority voting in uncontested director elections



Climate change



Shareholder written consent



Board diversity



Board declassification



Shareholders' ability to call special meetings



Report on sustainability



Political contributions disclosure



II.    Key Shareholder Proposal Topics and Trends During the 2017 Proxy Season

        A.    Environmental Proposals

The total number of environmental proposals increased in 2017, with shareholders submitting approximately 144 environmental proposals for 2017 meetings compared to 139 in 2016. Overall, the 55 environmental proposals voted on received average support of 28.9% of the votes cast, compared to 71 that received average support of 25.1% of votes cast in 2016.

The largest group of environmental proposals related to climate change, with 69 such proposals submitted in 2017 compared to 63 in 2016.  The 28 climate change proposals voted on in 2017 averaged support of 32.6% of votes cast.[19]  Three climate change proposals received a majority of the votes cast, as further discussed below.  Climate change proposals were submitted not just to oil and gas companies, but also to companies in the financial services and technology industries.  ISS recommended that shareholders vote "for" 23 of the 28 proposals (or 82.1%) voted on in 2017 and "for" 27 of the 37 proposals (or 73.0%) of the proposals voted on in 2016.

In addition to climate change proposals, environmental proposals submitted in 2017 included:

  • 28 proposals related to environmental impacts on the community or supply chains, including impacts of deforestation and pesticides (with 11 such proposals voted on averaging 23.6% support);
  • 24 proposals calling for reports on sustainability (with nine such proposals voted on averaging 30.0% support);
  • 12 proposals focusing on renewable energy (with four such proposals voted on averaging 18.3% support); and
  • Nine proposals focusing on recycling (with three such proposals voted on averaging 24.3% support).

        1.    Three Climate Change Proposals Receive Majority Support and Pass in 2017

As mentioned above, three climate change proposals received majority support.  Various factors may have contributed to the success of these proposals.  Most notably, in March, BlackRock announced in its 2017-2018 engagement priorities that it expects boards to have "demonstrable fluency in how climate risk affects the business and management's approach to adapting and mitigating the risk," and that where it has concerns that a board is not "dealing with a material risk appropriately," it may signal that concern through its vote.[20]  Vanguard also updated its proxy voting guidelines in 2017 to state that it would evaluate each environmental proposal on the merits and may support those with a demonstrable link to long term shareholder value.[21]

The three climate change proposals that passed specifically called for a report on the impact of climate change policies, including an analysis of the impacts of commitments to limit global temperature change to two degrees Celsius.  The three companies where this proposal passed were the following:

  • Occidental Petroleum Corp. received the proposal from Wespath Investment Management, the Nathan Cummings Foundation and other investors, including the California Public Employees' Retirement System ("CalPERS"), and it received support of 67.3% of votes cast by the company's shareholders, including BlackRock, a 7.8% owner. In an unprecedented move, BlackRock issued a press release announcing that it had supported the shareholder proposal.[22]
  • PPL Corp., a utility holding company, received the proposal from the New York State Common Retirement Fund, and it received support of 56.8% of votes cast by the company's shareholders, including CalPERS and other pension funds.
  • Exxon Mobil received the proposal from the New York State Common Retirement Fund, and it received support from about 62.1% of votes cast by the company's shareholders.

These votes reflect the new willingness of institutional investors to support environmental proposals and the effect of increased pressure from their clients to influence companies on environmental issues.  In addition, the same proposal was submitted to 18 other companies and voted on at ten companies, where it averaged 45.6% of votes cast.

        B.    Board Diversity Proposals

Board diversity continues to remain at the forefront of corporate governance discussions as investors and shareholder activists are increasingly pushing for gender diversity on the boards of U.S. public companies.  Most recently, BlackRock and State Street Global Advisors announced plans to drive greater gender diversity on boards through active dialogue with companies.  These institutional investors have indicated that, if progress is not made within a reasonable time frame, they plan to use their proxy voting power to influence change by voting against certain directors, such as members of nominating and governance committees.[23]

As such, perhaps unsurprisingly, in 2017 the number of board diversity proposals reached an all-time high.  Thirty-five proposals calling for the adoption of a policy on board diversity or a report on steps to increase board diversity were submitted in 2017 as compared to 28 proposals submitted in 2016.  As in 2016, a substantial number of board diversity proposals were withdrawn, likely due to commitments made by companies to the proponents of these proposals, such as adopting board recruitment policies inclusive of race and/or gender.[24]

Of the 35 proposals submitted in 2017, eight proposals have been voted on and received, on average, 28.3% of votes cast, as compared to six proposals in 2016, which received, on average, 19.1% of votes cast.  ISS recommended that shareholders vote "for" all but two of the proposals voted on in 2017 and "for" all but one of the proposals voted on in 2016.

Two board diversity proposals submitted in 2017 received majority support, as compared to one in 2016.  One of the successful proposals was submitted by the City of Philadelphia Public Employees Retirement System to Cognex Corp. requesting that the company's board adopt a policy for "improving board diversity [by] requiring that the initial list of candidates from which new management-supported director nominees are chosen . . . by the Nominating and Corporate Governance Committee should include (but need not be limited to) qualified women and minority candidates."  Cognex Corp. had no women on its board of directors.  The proposal received 62.8% of votes cast. The second proposal asked a different company to prepare a report (at a reasonable expense and omitting proprietary information) on steps the company is taking to foster greater diversity on its board.  The proposal received the support of 84.8% of votes cast.

These results, along with the continued investor focus on board composition and board diversity, mean that board diversity will continue to be raised in shareholder engagements, and that shareholder proponents likely will continue to use the Rule 14a-8 shareholder proposals process as a way to push for greater board diversity.

        C.    Other Diversity-Related Proposals

Approximately 34 proposals submitted to companies in 2017 related to discrimination and diversity concerns, compared to 16 such proposals in 2016.  These proposals included 20 proposals calling for the preparation of a diversity report, eight proposals calling for policy amendments to prohibit discrimination based on sexual orientation and gender, and six proposals calling for a report on company non-discrimination policies.  On average, the eight proposals related to discrimination and diversity concerns that were voted on in 2017 received support from 24.2% of the votes cast. ISS recommended that shareholders vote "for" all but three of these proposals voted on in 2017 and "for" all but two of these proposals voted on in 2016.

        D.    Gender Pay Gap

Approximately 19 proposals submitted in 2017 concerned the gender pay gap, compared to approximately 13 such proposals submitted for 2016 meetings.  Among the 19 proposals were 17 proposals requesting reports on the gender pay gap (two of which also requested a report on any race or ethnicity pay gaps), one proposal requesting evidence that no gender pay gap exists, and one proposal requesting disclosure of the number of women at each compensation percentile.  The proposals calling for a report on the gender pay gap include seven proposals submitted to financial institutions and credit card companies requesting a report on whether the company has a "gender pay gap," the size of the gap, and its policies and goals to reduce the gap.  On average, the eight gender pay gap proposals that were voted on received support from 18.8% of the votes cast.  ISS recommended that shareholders vote "against" all eight of these proposals in 2017 but "for" three out of the five proposals voted on in 2016.

        E.    Pay Disparity

Approximately 14 proposals regarding pay disparity were submitted in 2017, as compared with nine in 2016.  Among these proposals were two general types: proposals related to employee wages (eight proposals) and proposals requesting a report on the ratio between compensation paid to senior management and the median employee (six proposals).  On average, the three pay disparity proposals that were voted on in 2017 received the support of only 5.3% of the votes cast.  ISS recommended that shareholders vote "against" all three of these proposals voted on in 2017 and "against" both of these proposals voted on in 2016.

Among the proposals related to employee wages were six proposals requesting that companies adopt principles for minimum wage and/or guaranteeing a living wage (five of which were submitted by either, or both of, Trillium Asset Management and Zevin Asset Management) and two proposals requesting a report on incentive risks for low-paid employees.

Although the six pay ratio proposals represent a three-fold increase over the two pay ratio proposals submitted for 2016 meetings, the number remained well below the 15 pay ratio proposals submitted in 2015.  Pay ratio is likely to become a focus in upcoming months for companies and the investors eager to obtain this information, as under current SEC regulations, the pay ratio rule will generally require companies to disclose a pay ratio in their 2018 proxy statements.  Assuming no change in current regulations, the impact of this 2018 pay ratio disclosure on shareholder proposals may become apparent during the subsequent proxy season (i.e., in 2019).

        F.    Virtual Annual Meeting-Related Proposals

In recent years, an increasing number of companies have opted to hold exclusively virtual annual shareholder meetings.  These annual meetings are commonly referred to as "virtual-only annual meetings."[25]

After not submitting shareholder proposals on this topic during the 2015 and 2016 proxy seasons, some proponents submitted proposals in 2017 requesting that companies that previously held virtual-only annual meetings adopt a corporate governance policy to initiate or restore in-person annual meetings.[26]  Notably, none of these proposals have gone to a vote. 

Instead, in a decision critical for companies that currently hold or are contemplating switching to virtual-only annual meetings, the Staff issued a no-action letter for the 2017 proxy season permitting HP Inc. to exclude a shareholder proposal submitted by John Chevedden and Bart Naylor that objected to virtual-only annual meetings.  The Staff concurred that the proposal could be excluded under Rule 14a-8(i)(7) on the grounds that the "determination of whether to hold annual meetings in person" is related to the company's ordinary business operations.[27]

Since then, investors (including the New York City Comptroller, Walden Asset Management, the Investor Responsibility Research Center Institute, CalPERS, and the Council of Institutional Investors ("CII")) have continued to advocate against virtual-only meetings through their own policy pronouncements and direct communications with companies holding virtual-only meetings.  For instance, in the spring of 2017, the New York City Comptroller sent letters to more than a dozen S&P 500 companies that held virtual-only meetings in the prior year (or had announced that they would do so in the future) urging them to host in-person annual meetings instead, but noting that it welcomed and encouraged the use of new technologies to expand shareholder participation (i.e., in the context of "hybrid" annual meetings that allow both live and on-line participation).  Furthermore, under its updated proxy voting guidelines, the New York City Comptroller, on behalf of four New York City pension funds,[28] has indicated that the pension funds "may oppose all incumbent directors of a nominating committee subject to election at a 'virtual-only' annual meeting."[29] 

        G.    Proxy Access Proposals

Although proxy access was the second most common shareholder proposal topic in 2017, the spotlight has waned on this issue as proxy access has become the majority practice in the S&P 500 (over 60% have adopted as of the end of the 2017 proxy season).  Proxy access refers to the right of shareholders under a company's bylaws to nominate candidates for election to the board and have the shareholder nominees included in a company's proxy materials.

After two years of growing pains, proxy access has become the latest widely-accepted governance change among large-cap companies, following in the footsteps of previous shareholder-advocated governance changes, such as the replacement of plurality with majority voting in uncontested director elections and the declassification of boards.  Likewise, the core provisions in proxy access bylaws are now settled (i.e., ownership of 3% of a company's shares for at least three years, and the right to nominate up to 20% of the board by a shareholder or group of up to 20 shareholders).

Approximately 112 proxy access proposals were submitted for 2017 meetings, representing significantly fewer than the 201 proposals submitted for 2016 meetings and only slightly more than the 108 proposals submitted for 2015 meetings.  Of the 112 proxy access proposals, 59 proposals requested the adoption of a proxy access bylaw ("adopt proxy access proposals") and 53 proposals requested amendments to an existing proxy access bylaw ("amend proxy access proposals").  Thirty-four of the adopt proxy access proposals and nearly all of the amend proxy access proposals were submitted by John Chevedden (in his own capacity and on behalf of others), while an additional 18 adopt proxy access proposals were submitted by the New York City Comptroller.

The 18 adopt proxy access proposals voted on received average support of 63.1% of votes cast, while the 20 amend proxy access proposals voted on received average support of 28.5% of votes cast.  A total of 13 proxy access proposals (all adopt proxy access proposals) received a majority of votes cast.  ISS recommended that shareholders vote "for" all of the proxy access proposals voted on in 2017 and "for" all but one of the proxy access proposals voted on in 2016.

The main proxy access development in 2017 related to proposals seeking to amend an existing proxy access bylaw to increase the number of shareholders permitted to constitute a nominating group.  The Staff generally agreed with companies that they could exclude these proposals as substantially implemented, provided that the no-action request demonstrated how the existing aggregation limit achieved the proposal's goal of providing a meaningful proxy access right.[30]

As in 2016, a number of companies also obtained no-action letters concurring that a proposal seeking adoption of proxy access had been substantially implemented when the companies responded to the receipt of an adopt proxy access proposal by adopting a proxy access bylaw prior to their annual meetings, even though the companies' bylaws varied in certain respects from the proxy access terms requested in the proposals.[31]

III.    Potential Reform of Shareholder Proposal Rule

There have been growing calls over the last decade to amend Rule 14a-8, the SEC's shareholder proposal rule, to update various thresholds in the rule and to address some of the ways in which the rule has been abused.  For example, in 2014, the U.S. Chamber of Commerce, along with eight other business organizations, petitioned the SEC to raise the existing threshold for the excludability from company proxy materials of shareholder proposals previously submitted to shareholders that did not elicit meaningful shareholder support.  The petition requested that the SEC reconsider its resubmission rule by conducting a thorough cost-benefit analysis of the current rule and creating new threshold percentages based on the conclusions gleaned from its cost-benefit analysis.[32]

More recently, the House Republicans' proposal for financial regulation reform, the CHOICE Act, tackled the issue.  The legislation, which passed the House by a 233-186 vote in early June, would amend the shareholder proposal rule to (1) increase the holding period for the shareholder proponent from one year to three years; (2) require that a shareholder hold 1% of a company's outstanding stock (and eliminate the option to satisfy this requirement by holding $2,000 in stock) for the holding period; (3) prohibit the submission of proposals other than by the shareholder (so-called "proposals by proxy"); and (4) increase the percentage of support that a proposal must have received the last time it was voted on in order to be resubmitted.  The proposed resubmission thresholds would exclude proposals that previously were voted on in the past five years and most recently received less than 6% (currently 3%) if voted on once, 15% (currently 6%) if voted on twice, and 30% (currently 10%) if voted on three times.[33]

The CHOICE Act has faced strong opposition from institutional investors, including CII, which sent a letter to House members urging them to oppose the bill.[34] While the legislation's prospects in the U.S. Senate are uncertain, the SEC may consider Rule 14a-8 amendments (although that is more likely to occur once the two vacancies on the Commission are filled).

IV.    Top Take-Aways for 2017 Season

Based on the results of the 2017 proxy season, there are several key take-aways to consider:

  • First, 2017 was the year for both environmental and social proposals to take center stage, and the spotlight on these issues is likely to continue to shine brightly in 2018.

    • Over 40% of shareholder proposals submitted in 2017 dealt with environmental and social issues, making this the largest category of shareholder proposals for the first time since 2014.
    • The key environmental proposals in 2017 were climate change proposals (69 in 2017, with those voted on averaging 33.8% support); environmental impacts on communities or supply chains (28 in 2017, with those voted on averaging 23.6% support), and reports on sustainability (24 in 2017, with those voted on averaging 30.0% support).  The key social proposals to watch are board diversity proposals (35 in 2017, with those voted on averaging 28.3% support); diversity-related proposals (34 in 2017, with those voted on averaging 24.2% support); and gender pay gap proposals (19 in 2017, with those voted on averaging 18.8% support).
    • With the Administration's decision to withdraw from the Paris Climate Accord and decrease federal support for environmental initiatives, the focus on private sector environmental initiatives has increased, including through the submission of shareholder proposals. In this context, engagement on climate-related matters has become more important, as several institutional investors have indicated that company engagement and responsiveness on these issues can sway their votes.
    • With several institutional investors increasingly willing to support environmental proposals, companies should consider whether to take additional actions with respect to their sustainability practices and how these efforts are communicated to investors.  
  • Second, in the area of virtual-only annual meetings, the stage is set for increased debate over this hot-button issue.
    • Companies now have solid no-action request precedent to exclude these shareholder proposals.  That being said, certain investors are very vocal about their opposition to virtual-only meetings. Their activism (both leading up to and during the meeting) may discourage some companies from making a move to virtual-only meetings.
    • Companies that are currently holding virtual-only annual meetings may face increasing pressure to either hold hybrid annual meetings or to enhance virtual-only meetings to make them as interactive as possible (i.e., as close to a physical annual meeting as possible).  This would include live audio and/or video participation for all shareholder participants, which is something most companies that hold virtual-only annual meetings currently do not accommodate.
  • Third, although the spotlight on proxy access has waned, this has become the latest standard governance practice.
    • Companies that have not yet adopted proxy access are likely to continue to face shareholder proposals on this topic in the coming years, and these proposals are likely to continue to receive significant support—in 2017, adopt proxy access proposals voted on received average support of 63.2% of votes cast.
    • Accordingly, companies that have not yet adopted proxy access may consider whether to do so—and this may arise either in response to a shareholder proposal or due to the desire to align with majority practice among S&P 500 companies.  Likewise, companies that previously adopted proxy access, particularly those that were early adopters of proxy access, may want to revisit their bylaws and consider whether their provisions align with the terms adopted by the majority of adopters.
  • Lastly, the momentum to amend Rule 14a-8 is growing, albeit slowly.
    • There is increasing support for amendments to the shareholder proposal rule to update various thresholds in the rule and address some of the ways in which the rule has been abused.  Rule 14a-8 was last amended in 2010 to no longer permit the exclusion of proxy access shareholder proposals.  However, there have been calls for some time to address other aspects of the rule.  Top items on the reform list for Rule 14a-8 include increasing the holding period and ownership requirements for shareholder proponents and increasing the resubmission thresholds for proposals that were voted on in prior years.  
    • The CHOICE Act takes a comprehensive approach to amending the rule and aims to address these "top items" on the reform list as well as to prohibit submission of so-called "proposal by proxy" (i.e., ability of a proponent to act as a designee for an actual shareholder with respect to a proposal).  Given the scope of the reforms in the CHOICE Act, and with a new Administration and growing support for deregulation, changes to Rule 14a-8 may finally happen.  Even without Congressional action, the SEC could take action on its own to amend Rule 14a-8 with its rulemaking authority.

   [1]   Gibson, Dunn & Crutcher LLP assisted companies in submitting the shareholder proposal no-action requests discussed in this alert that are marked with an asterisk (*).

   [2]   For the purposes of reporting in this alert statistics regarding no-action requests, references to the "2017 proxy season" refer to the period between October 1, 2016 and June 1, 2017. Data regarding no-action letter requests as well as no-action letters was derived from the information available on the SEC's website. Unless otherwise noted, all data in this alert on shareholder proposals submitted, withdrawn, and voted on is derived from the Institutional Shareholder Services ("ISS") publications and the ISS shareholder proposals and voting analytics databases, and includes proposals submitted and reported on in these ISS databases at any time prior to June 1, 2017 for annual meetings of shareholders at Russell 3000 companies held at any time in 2017 ("2017 meetings"). References in this alert to proposals "submitted" include those shareholder proposals voted on or that were withdrawn by the proponent. Voting results are reported on a votes cast basis (votes for or against) and do not address the impact of abstentions. Where statistics are provided for prior years, the data is for a comparable period in those years.

   [3]   Corporate civic engagement includes proposals regarding support for political, lobbying, or charitable organizations.

   [4]   Shareholder proposals are categorized based on the subject matter of various proposals.

Social proposals cover a wide range of issues and include proposals relating to (i) board diversity; (ii) discrimination and other diversity-related issues; (iii) the gender pay gap; (iv) establishing a board committee on human rights; (v) requiring a director nominee with social and environmental qualifications; and (vi) providing a report on drug pricing increases.

Environmental proposals include proposals addressing (i) a report on climate change; (ii) a report on or the adoption of greenhouse gas emissions goals; (iii) actions to address risks in light of climate change; (iv) reviewing public policy advocacy on climate change; (v) recycling; (vi) renewable energy; (vii) hydraulic fracturing; and (viii) a report on sustainability.

Climate change proposals include proposals addressing (i) a report on climate change; (ii) a report on or the adoption of greenhouse gas emissions goals; (iii) actions to address risks in light of climate change; and (iv) reviewing public policy advocacy on climate change.

Proxy access proposals are proposals calling on a company to adopt a proxy access right or to revise an existing proxy access bylaw.

Political contributions disclosure proposals call on a company to provide information regarding political contributions, while lobbying disclosure proposals request information on a company's lobbying policies and practices.

   [5]   Includes Staff-issued responses either granting or denying exclusion of a proposal, or following withdrawal of a no-action request, usually in response to a proponent's withdrawal of a proposal.

   [6]   All percentages are based on the number of no-action requests for which relief was granted.

   [7]   Lowe's Companies, Inc. also argued that the proposal was excludable because it had already been substantially implemented (Rule 14a-8(i)(10)) and because it related to operations that did not meet the five percent threshold and were not otherwise significantly related to the company's business (Rule 14a-8(i)(5)). The Staff did not address these arguments.  See Lowe's Companies, Inc. (avail. Mar. 8, 2017).

   [8]   See, e.g., The TJX Companies, Inc. (avail. Mar. 8, 2016)*.  One proposal was withdrawn (Panera Bread Co.).

   [9]   See, e.g., CVS Health Corp. (avail. Mar. 1, 2017).

[10]   See id.; see also Amazon.com, Inc. (avail. Mar. 1, 2017)*;  The Home Depot, Inc. (avail. Mar. 1, 2017)*; and The TJX Companies, Inc. (avail. Mar. 1, 2017)*.  One proposal was withdrawn (Chipotle Mexican Grill, Inc.).

[11]   See Celgene Corp. (avail. Mar. 19, 2015); Vertex Pharmaceuticals, Inc. (avail. Feb. 25, 2015); Gilead Sciences, Inc. (avail. Feb. 23, 2015).

[12]   See, e.g., Amgen Inc. (avail. Feb. 10, 2017); Eli Lilly & Co. (avail. Feb. 10, 2017).

[13]   See, e.g., Johnson & Johnson (avail. Feb. 23, 2017)*.  The proposal was excluded on procedural grounds at two companies and was withdrawn at a third company.

[14]   See Deere & Co. (avail. Dec. 5, 2016).  Deere argued that the proposal sought to micromanage the company by replacing the judgment of management with specific quantitative measures and timelines provided by shareholders, who, as a group, would not be in a position to make an informed judgment. The Staff also concurred that SeaWorld Entertainment, Inc. could exclude a shareholder proposal for the same reason (the proposal "seeks to micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment"). See SeaWorld Entertainment, Inc. (avail. Mar. 30, 2017).

[15]   As further discussed below, the Staff generally agreed with companies that they could exclude as substantially implemented "amend proxy access" proposals that only requested an increase in the number of shareholders permitted to constitute a nominating group, provided that the no-action requests included specified share ownership information demonstrating that the aggregation limit in the company's bylaw compared favorably to the limit in the shareholder proposal. See, e.g., Amazon.com, Inc. (avail. Mar. 7, 2017)*; Anthem, Inc. (avail. Mar. 2, 2017)*; and General Dynamics Corp. (avail. Feb. 10, 2017).

[16]   Based on the number of no-action requests for which relief was granted.

[17]   Voting results are reported on a votes cast basis (votes for or against) and do not address the impact of abstentions.

[18]   The information in this alert regarding the three climate change proposals that received majority support includes the Exxon Mobil Corp. shareholder vote on May 31, 2017, which ISS voting results data did not yet report as of June 1, 2017.  Apart from this information, the data in this alert regarding climate change proposals is based on ISS data as of June 1, 2017, and, therefore, excludes this proposal. 

[19]   Climate change proposals submitted in 2017 included 35 proposals calling for a report on climate change (including the three that received majority support); 29 proposals calling for a report on, or adoption of, greenhouse gas emissions goals; three proposals requesting the company to take action to address risks in light of climate change; and two proposals related to the review of public policy advocacy on climate change.  

[20]   BlackRock, Our Engagement Priorities for 2017-2018, available at: https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities.

[21]   Vanguard, Vanguard's Proxy Voting Guidelines, available at: https://about.vanguard.com/investment-stewardship/voting-guidelines/. Furthermore, Fidelity updated its proxy voting guidelines to state that "[i]n certain cases…Fidelity may support shareholder proposals that request additional disclosures from companies regarding environmental or social issues, where it believes that the proposed disclosures could provide meaningful information to the investment management process without unduly burdening the company." See Fidelity, Fidelity Funds' Proxy Voting Guidelines, available at: https://www.fidelity.com/about-fidelity/fidelity-by-numbers/fmr/proxy-voting-overview.     

[22]   See BlackRock Press Release, available at: https://www.blackrock.com/corporate/en-us/literature/publication/blk-vote-bulletin-occidental-may-2017.pdf (specifically noting that "when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations. Climate-related risks and opportunities are issues we have become increasingly focused on at BlackRock as our understanding of the related investment implications evolves").

[23]   BlackRock, Our Engagement Priorities for 2017-2018, available at: https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities; State Street Global Advisors, SSGA's Guidance on Enhancing Gender Diversity on Boards, available at: https://www.ssga.com/investment-topics/environmental-social-governance/2017/guidance-on-enhancing-gender-diversity-on-boards.pdf.

[24]   For instance, in 2017, NorthStar Asset Management filed eight board diversity proposals.  Six of these proposals were withdrawn because companies agreed to make certain commitments with respect to seeking greater board diversity. See, e.g., Jeff Green and Emily Chasan, Investors Push Corporate Boards to Add Women, People of Color, Bloomberg, available at: https://www.bloomberg.com/news/articles/2017-03-02/shareholders-target-pale-male-and-stale-corporate-boards.

[25]   According to Broadridge, in 2016, 187 companies held virtual annual meetings (including virtual-only meetings and hybrid meetings that are both virtual and physical).  Of those, 83% (155) were virtual-only meetings, as compared to 67% in 2015.  In addition, of these 155 virtual-only meetings, six were conducted with live video, while the vast majority (149) used only live audio. Moreover, of the 44 companies that held a hybrid annual meeting in 2015, 12 of them switched to virtual-only meetings in 2016.

[26]   ISS data includes information about three such proposals. Two of these proposals were excluded after receiving no-action relief as described further below, and one proposal was excluded based on procedural grounds. 

[27]   See HP Inc. (avail. Dec. 28, 2016)*.  In permitting HP to exclude the proposal, the Staff reaffirmed its position on this subject from more than 14 years ago.

[28]   These four funds are the New York City Employees' Retirement System, the New York City Police Pension Fund, the New York City Fire Department Pension Fund and the Board of Education Retirement System of the City of New York. The guidelines for these four funds indicate that a fifth New York City pension fund, the New York City Teachers' Retirement System, has the same policy. See The Office of the New York City Comptroller, Corporate Governance Principles and Proxy Voting Guidelines (last amended Apr. 2017), available at: https://comptroller.nyc.gov/wp-content/uploads/documents/NYCRS-Corporate-Governance-Principles-and-Proxy-Voting-Guidelines_April-2016-Revised-April-2017.pdf.

[29]   The revised policy applies to S&P 500 companies starting in 2017 and will expand to cover all U.S. portfolio companies in 2018. Nominating committee members can avoid negative votes during 2017 if their companies agree to hold in-person or hybrid annual meetings beginning in 2018.

[30]   See, e.g., Leidos Holdings, Inc. (avail. Mar. 27, 2017); Quest Diagnostics Inc. (avail. Mar. 23, 2017); ITT Inc. (avail. Mar. 16, 2017).

[31]   See, e.g., Marriott International, Inc. (avail. Feb. 27, 2017)*; OGE Energy Corp. (avail. Feb. 24, 2017); Comcast Corp. (avail. Feb. 15, 2017).

[32]   U.S. Chamber of Commerce, Petition for Rulemaking Regarding Resubmission of Shareholder Proposals Failing to Elicit Meaningful Shareholder Support (Apr. 9, 2014), available at: https://www.sec.gov/rules/petitions/2014/petn4-675.pdfSee also Business Roundtable, Principles of Corporate Governance 2016, available at: https://businessroundtable.org/sites/default/files/Principles-of-Corporate-Governance-2016.pdf.

[33]   This would raise the thresholds to the same percentages that were proposed but not adopted by the SEC in 1998.  See Release No. 40018, available at: https://www.sec.gov/rules/final/34-40018.htm. ("We had proposed to raise the percentage thresholds respectively to 6%, 15%, and 30%. Many commenters from the shareholder community expressed serious concerns about this proposal. We have decided not to adopt the proposal, and to leave the thresholds at their current levels."). 

[34]   Council of Institutional Investors, Institutional Investors Oppose Key Provisions of the Financial CHOICE Act, available at: http://www.cii.org/choice_act_press_release. Public pension funds backing the CII letter include the CalPERS, Colorado Public Employees' Retirement Association and the New York State Teachers' Retirement System.


9 June 2017

What the UK Election Result Means for Brexit 

by Gibson Dunn

To Our Clients and Friends:   

  1. Theresa May's decision to call a snap[1] UK general election has backfired.  The Conservatives emerged as the biggest party in yesterday's UK general election but lost their overall majority.  Theresa May's authority and leadership have been greatly weakened, perhaps even fatally damaged, by the shock result. 
  2. The Conservatives won 319[2] (down from 331) seats in the House of Commons.  A governing party needs 326 seats out of 650 seats for a majority.   The Labour party gained 29 seats, enjoying their biggest increase in the share of the vote since 1945.  A so-called "progressive alliance" between them and such of the minority parties as have indicated a willingness to work in coalition with Labour would not be sufficient to command an outright majority in the House of Commons.
  3. As leader of the largest party in Parliament, Theresa May has been asked by Queen Elizabeth (as head of state) to form a government, relying on Northern Ireland's Democratic Unionist Party (DUP) for support.  The DUP have won 10 of the 18 Westminster seats contested in Northern Ireland whilst the nationalist  Sinn Féin party have won seven.  Given that Sinn Féin MPs do not take their seats in the House of Commons, the Conservatives and the DUP should together have 326 out of 643 MPs, giving the two parties a combined majority of nine.
  4. Theresa May has vowed to offer a "period of stability" and has said she has no plans to resign.  Arlene Foster, leader of the DUP, has confirmed her party's in principle support for a Conservative-led administration and has committed her party to preserving the Union and bringing stability to the UK.  Detailed discussions of the terms of the Conservative-DUP understanding will begin shortly.
  5. When Theresa May called the election on 18 April she had a majority of 17 MPs in the House of Commons and was 20 percentage points ahead of Labour in the polls.  She called the snap election in the hope of increasing her majority and strengthening her hand in Brexit talks with the EU.  But her position has been severely weakened.  Her wafer thin majority (taking DUP support into account) will make it even more difficult for her to make the awkward compromises that will be needed to reach a Brexit deal with the other EU member states.
  6. It is possible that her leadership position will be challenged by Conservative MPs once an administration has been formed and the new session of Parliament has been opened.  Many MPs feel that this was an unnecessary election which has drastically weakened the strength of the Conservative government, and they hold Mrs. May and her closest advisers directly responsible for that.  It is possible that a new Conservative Prime Minster could seek a fresh mandate through another general election or that the Conservative-DUP pact could break down such that no government can be formed and a second general election has to be held.
  7. Formal Brexit discussions between the UK and the EU are due to begin on 19 June 2017 (which is also the date for the opening of the next UK Parliament).  Delays in forming a new UK government, or even a second general election in 2017, could impede these Brexit talks, squeezing an already tight negotiation timetable.  The UK government triggered Article 50 (the official legal notification to the EU that the UK is going to leave the bloc) on 29 March 2017.  It means that, unless otherwise agreed with the EU member states, the UK will be out of the EU by the end of March 2019 - even if no withdrawal agreement is in place.  It is unclear whether Article 50 can be withdrawn once invoked.
  8. It is not clear if the UK will stick to the Brexit policy mapped out before the election when Theresa May said the UK would leave Europe's single market and customs union.  There is a possibility that the hung parliament could result in the UK stepping back from the "hard Brexit" stance taken by Theresa May and/or in the EU imposing a softer Brexit on the UK by virtue of the UK's weaker negotiating position. 
  9. The provisions in the UK Finance Bill which were deferred because of the election are likely to be enacted later this year. These include the corporate interest restriction rules, the shareholding exemption reforms and the reformed inheritance tax rules for non-UK domiciliaries with interests in UK residential property.

[1]   The Fixed-term Parliaments Act 2011 introduced fixed-term elections to the UK Parliament.  Under the Act, Parliamentary elections must be held every five years, beginning on the first Thursday in May 2015, then 2020 and so on.  However, the Act provides that a snap election can be called when the government loses a confidence motion or when a two-thirds majority of MPs vote in favour.

[2]   Subject to final confirmation following Kensington seat recount.



23 February 2017

by Gibson Dunn

SEC Brings Enforcement Action for Deficient Disclosure of Financial Advisors’ Fee Arrangements

On February 14, 2017, the U.S. Securities and Exchange Commission (the “SEC”) announced the settlement of an enforcement action against CVR Energy, Inc. (“CVR” or the “Company”).  The SEC brought action against the Company for its failure to disclose adequately the material terms of its fee arrangements with two investment banks in connection with the financial advisory services each bank provided to CVR during the pendency of a hostile tender offer launched by an activist.  See CVR Energy, Inc., Exchange Act Release No. 80039 (February 14, 2017).

Notwithstanding the fact that the banks failed to help CVR avoid a takeover by the activist or produce a higher offer price, they collected approximately $36 million in success fees based on the expansive definition of the term “success” set forth in their engagement letters with the Company.  The engagement letters (negotiated with the assistance of CVR’s outside counsel), provided the banks would receive an increased fee in the event the company were sold, regardless of whether:  (i) the final sale price was deemed adequate by CVR’s board, (ii) the banks succeeded in defending against the activist’s bid, or (iii) the banks were successful in causing the activist to raise its bid for the Company.

According to the SEC’s order, CVR violated Section 14(d)(4) and Rule 14d-9 thereunder which require an issuer to summarize the material terms of the compensation arrangements with its financial advisor when disclosing a solicitation or recommendation on Schedule 14D-9 in response to a tender offer.  CVR’s Schedule 14D-9 (prepared by CVR’s outside counsel), indicated the banks’ fee arrangements were “customary.”  The SEC’s order found CVR’s disclosure of customary compensation inadequate under the circumstances noting that it failed to inform CVR shareholders of the potential conflicts of interest arising from the structure of the fee arrangements.

This enforcement action comes on the heels of recent guidance published by the SEC that addresses the appropriate level of disclosure relating to a financial advisor’s fee arrangements in Schedule 14D-9 filings.  On November 18, 2016, the Staff in the Office of Mergers & Acquisitions in the Division of Corporate Finance (the “Staff”) at the SEC released new Compliance and Disclosure Interpretations (“C&DIs”) outlining the Staff’s view of what is appropriate to disclose when summarizing compensation arrangements with financial advisors retained to assist in responding to a registered tender offer.  The C&DIs make clear that “a summary of all material terms” in a Schedule 14D-9 is required.  Even though an advisor may disclaim making a recommendation to or solicitation of shareholders, where the issuer’s board or independent committee retains a financial advisor to advise with respect to a tender offer and the analysis is discussed in the issuer’s Schedule 14D-9, a summary of material terms is required.  In such case, the act of retaining the advisor and discussing the engagement in the Schedule 14D-9 is viewed as sufficient to bring the terms of the advisor’s engagement within the scope of the line item disclosure requirement.

The C&DIs serve as a good reminder to issuers (and their counsel) that boilerplate disclosures with respect to an advisor’s compensation can be deemed inadequate by the Staff.  Specifically, issuers can expect the Staff to challenge vague or general statements in Schedule 14D-9s indicating that an advisor will receive “customary compensation.”  While acknowledging that the appropriate level of disclosure will depend on the facts and circumstances, the Staff noted the summary should be sufficiently detailed to allow an investor to make an informed decision regarding the merits of a solicitation or recommendation, as well as the objectivity of the financial advisors’ analyses or conclusions.

The SEC order in the CVR case advances this point one step further and raises the stakes for including generic or boilerplate disclosure.  Thus, going forward companies confronted with a potential takeover (as well as their counsel), should take great care when negotiating the terms of engagement letters with financial advisors.  The terms should be tailored to the circumstances, including any carve-outs (where appropriate) from the payment of success fees in hostile bids, such that the interests of a company’s financial advisor are aligned with the interests of shareholders.  Moreover, those involved in drafting and approving the disclosure in Schedule 14D-9 statements should ensure the filing contains the appropriate level of disclosure on compensation arrangements with advisors, particularly where such arrangements present a potential for conflicts of interest. 

Special thanks to Eduardo Gallardo, Jason Mehar and Jason Park who assisted with the drafting of this post.



14 February 2017

Oh SNAP! This time you get no voting power!

SNAP Inc., owner of the budding social media platform snapchat, has announced plans to go public capturing the imagination of investors following a year of abysmal technology IPOs in 2016.

With plans to raise an estimated $3 billion from its IPO, market observers estimate that the Company will fetch a valuation of $20 to $25 billion, a healthy premium to its most recent valuation of $18 billion as a private company. According to Dealogic, 26 technology IPOs in 2016 raised $4.3 billion from US exchanges.

Echoing the IPO behaviour of other technology firms, SNAP founders Even Spiegel, 26, and Bobby Murphy, 28, plan to implement a multiple class structure. But unlike their tech peers, they plan to issue shares to the public with zero voting rights, which is considered extreme even by technology industry standards. Google founders Sergey Brin and Larry Page gave themselves disproportionate voting power back during their 2004 IPO allowing them to control almost 60% of voting rights. Mark Zuckerberg of Facebook followed suit in 2012 only to strip investors of their voting rights last year in order to maintain 60% of voting rights while donating substantially all of his shares to his foundation. 

Voting power

SNAP has created a three-tiered share structure.

The company boasts just over 512 million Class A shares, which carry zero voting rights. The founders each hold 21.8% of these shares. Early investors Benchmark Capital Partners and Lightspeed Venture Partners hold 12.7% and 8.3% of these shares respectively with SNAP board member and Benchmark general partner Mitchell Lasky holding a further 12.7%.

Class B shares carry 1 vote per share and are primarily owned by the aforementioned venture capital funds: Benchmark (22.8%), Lightspeed (15%), and Lasky (22.8%). Atop the share hierarchy are Class C shares which are equally owned by Spiegel and Murphy and each boast 10 votes per share effectively giving the young founders 88.6% of voting rights.

Post-IPO, each Class B share transferred will automatically convert to a Class A shares save for a few exceptions. Additionally, Class C shares will convert to Class B shares upon transfer save for a few exceptions, which include the transfer of shares between the founders themselves. Both Class B and Class C shares convert to Class A and Class B shares, respectively upon the death of the holder. Moreover, should one of the founder’s holding of Class C shares fall below 30% of his holding at the time of the IPO or a specific number of shares to be later determined, said shares would automatically convert to Class B shares. And when there are no Class C shares left, outstanding Class B shares will convert to Class A shares, all of which would gain voting power to the tune of 1 vote per share.

Source: S-1 SEC filing

A cursory review of the holdings would reveal that the SNAP founders each enjoy a control premium of almost 2.29 times. In our previous reporting, we defined control premium as voting power as multiple of actual economic interest. A control premium in excess of 1 violates the “one-share/one-vote” principle and enables a concentrated group of shareholders to control the firm.

In a report co-authored by IRRC and ISS, researchers found that controlled firms with single class structures outperformed their counterparts with multiple class structures in the S&P 1500 Composite Index over a 3-year, 5-year, and 10-year performance period ending in August 2012. However, multiple class structures did outperform over a 1-year period. In analysing SEC disclosures between 1990 and 1998, Chad Zutter of the University of Pittsburgh found a substantial discount applied to the initial valuation of dual class structures. He interpreted it as the market’s perception of “a relationship between the extreme entrenchment of dual-class management and firm performance” and concluded that the market tends to overprice said structures around the time of the IPO only to correct as time passes. These findings seem to broadly confirm the conclusions derived from the IRRC/ISS report.

Interestingly, other researchers have adopted a more nuanced view. Thomas Chemmanur and Yawen Jiao’s IPO model revealed that dual class IPOs are more likely to outperform their single class peers when “the reputation of the incumbent is high and the firm is operating in an industry where the difference in intrinsic values between the projects with high and low near term uncertainty is large”. Whether Spiegel and Murphy the true visionaries they are trumpeted up to be is yet to be determined, but the technology sector does offer its fair share of uncertainty and astronomical valuations.

Disenfranchisement did not seem to deter investors in the technology sector in the past, but have the SNAP founders gone too far? In a recent letter to Spiegel, Murphy, and chairman-designate Michael Lynton, the 18 members of the Council of Institutional Investors (CII), which include the California Public Employees Retirement System (CalPERS) and Aberdeen Asset Management, urged SNAP to adopt a single class share structure citing the findings in the IRRC study.

The Corporate Governance Principles for US Listed Companies championed by the Investor Stewardship Group (ISG), a grouping of 16 US and international institutional investors which include Blackrock and Vanguard, has also publicly rebuked dual class structures. The second concisely echoes this sentiment:  “Shareholders should be entitled to voting rights in proportion to their economic interest”. It further calls for boards that currently employ dual class structures to regularly review the benefits of such a practice and to “establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders”. Although the ISG does not plan to uphold these principles until January 1, 2018, their message is loud and clear.

Expensive valuation

Talk of SNAP’s valuation has gripped markets. Although an IPO price has yet to be disclosed, analysts are estimating a valuation of $20-$25 billion, a multiple of 62 times FY 2016 sales or 25 times FY 2017 projected revenues. A very expensive proposition compared to the valuations used for some of its peers such as Facebook and Twitter.

Making this generous valuation even more worrisome is the fact that SNAP reported a gross margin of almost -12% for FY 2016 (although margins turned to a positive 7% in Q4 2016). These abysmal margins are due to the fact that, unlike Facebook and Twitter, SNAP outsources its data services to the Google Cloud. Earlier in the year, SNAP signed a 5-year deal with the Google Cloud Platform that requires a minimum payment of $400 million/year to provide the infrastructure vital to keep its Snapchat application running. Twitter, at a similar revenue base, boasted gross margins of 63%.

Other profitability measures do not paint a prettier picture. Adjusted EBITDA worsened by 57% to reach -$459 million in FY 2016 and the Company continues to haemorrhage cash flow, reporting Free Cash Flow of -$678 million, almost double its cash loss in the prior year period. It is no surprise then that SNAP’s valuation is predicated on the anticipation of stellar revenue growth going forward, with estimates that they would reach $1 billion in FY 2017 vs. $405 million last year. Nevertheless, growth in Daily Active Users (DAU) appears to be losing steam, reporting year-on-year growth of 40% in Q4 2016, down from a peak of 65% growth in Q2 2016. Even quarterly DAU growth has fallen to the single digits in the last two quarters of FY 2016. Analysts have not overlooked the potential for Facebook’s “Instagram Stories” to accelerate this trend.

Shareholders should also note that Twitter, trading currently at $18-$19/share, is still almost 50% below its IPO valuation and market observers are sceptical as to whether it can generate the growth necessary to justify a higher valuation. Facebook, after debuting in a disastrous IPO which shed over 50% of its value, has come roaring back, currently trading at 350% of its IPO price, after it definitively proved its staying power.

The stakes are evidently high, and given the extremely volatile nature of young technology companies, it is incumbent upon boards to at the very least give shareholders a say in how their companies are run.

Executive Compensation

Our discussion then turns to executive compensation, where it appears that SNAP executives are being generously compensated for their potential to generate future growth as opposed to actual performance.

Evan Spiegel, who currently serves as CEO collected $2.4 million in compensation in FY 2016 and received no shares as compensation. However, shareholders should note that the Class A shares he received as a dividend for his holdings are excluded from these figures.

The Company has stated that post-IPO, Spiegel will receive a symbolic salary of $1, mirroring that of Mark Zuckerberg and the Google founders. Nevertheless, he is slated to receive an award of 3% of all outstanding shares on the closing of the IPO, or should the valuations being floated be realized, a handsome $600 to $750 million windfall. The award will be paid in the form of Class C shares, making Spiegel the largest controlling shareholder, pushing him well ahead of Murphy in the pecking order.

Last year SNAP made headlines when it poached Imran Khan from Credit Suisse to be its chief strategist, rewarding him with 7 million restricted share units (RSUs) worth an astounding $146 million. Almost all share awards (RSUs and stock options) have a service condition (time spent at the company) and a performance condition. According to the S1 filing, the performance condition is ‘satisfied on the occurrence of a qualifying event, which includes a change in control or the effective date of an initial public offering’.

As of December 31, 2016, SNAP had almost $1.5 billion in employee RSUs that have not yet satisfied the service condition. More troublingly, had the IPO occurred on December 31, 2016, SNAP would have recognized a colossal $1.1 billion in compensation for RSUs that have already satisfied the service condition. The most recent RSUs granted in November-December 2016 boasted a weighted average fair value of $16.33/share. As for stock options granted during the year, the weighted average fair value was $30.19/share, with a strike price of $1/shares. In July 2016, 1,253,028 stock options were granted with an underlying common stock fair value of $31.08/share.

A successful IPO will prove to be an enormous payday for SNAP executives, and given the lack of genuine performance conditions, they may not bear the consequences should a massive correction in the share price take hold à la Twitter.

Much ado about nothing?

If SNAP were to become the next Facebook, dissenting voices will surely be silenced as institutional investors reap the benefits of a higher share price. On the flipside, investors stand to lose quite a bit and will not have the power to change how the Company is being run.

Proxinvest is seriously concerned by the unabashed subversion of shareholder rights at the expense of power-hoarding visionaries, the venture capitalists who enable them, and the opportunistic bankers who hype them. No promise of potential short-term profits should replace shareholder democracy and reasonable valuations.

The question investors have to therefore contemplate is whether accepting excessive non-performance based remuneration and a dual class structure that marginalizes them, is truly worth the risk of investing in SNAP? Time alone will tell.

Imad Barake



5 January 2017

SEC Staff Grants No-Action Request Concurring with Exclusion of Shareholder Proposal On Virtual-Only Annual Meetings

by Gibson Dunn

In recent years, an increasing number of companies have opted to hold annual shareholder meetings exclusively online.  These annual meetings are commonly referred to as “virtual-only annual meetings”.   In a decision critical for companies that currently hold or are contemplating switching to virtual-only annual meetings, the staff of the Securities and Exchange Commission (the “SEC Staff”) recently issued a no-action letter permitting a company to exclude a shareholder proposal that objected to virtual-only annual meetings.  Specifically, the shareholder proposal requested that the company’s board adopt a policy to initiate or restore in-person annual meetings.  The SEC Staff concurred that the proposal could be excluded under Rule 14a-8(i)(7) on the grounds that the decision whether to hold in-person annual meetings is related to the company’s ordinary business operations because the proposal “relates to the determination of whether to hold annual meetings in person.”  The SEC Staff’s decision is not yet available on the SEC’s website.   

The proposal in question was submitted to HP Inc. (“HP”) by John Chevedden and Bart Naylor.  HP has been holding its annual meetings solely online since 2015.  Previously, in a no-action letter dated December 9, 2016, the SEC Staff permitted Hewlett Packard Enterprise (which also adopted a virtual-only annual meeting format when it became a stand-alone publicly traded company) to exclude the same proposal based on procedural grounds without addressing the Rule 14a-8(i)(7) arguments (which Hewlett Packard Enterprise also included in its no-action request).  By concurring with arguments made by Gibson Dunn on HP’s behalf, the SEC Staff confirmed that this proposal is also excludable under Rule 14a-8(i)(7).

In permitting HP to exclude the proposal, the SEC Staff reaffirmed its position on this subject from more than 14 years ago.  Specifically, in EMC Corp. (avail. Mar. 7, 2002), the Staff concurred in the exclusion under Rule 14a-8(i)(7) of a proposal “request[ing] that EMC Corporation adopt a corporate governance policy affirming the continuation of in-person annual meetings, adjust its corporate practices policies [sic] accordingly, and make this policy available publicly to investors” on the basis that the proposal “relat[ed] to EMC’s ordinary business operations (i.e., the determination whether to continue to hold annual meetings in-person).”   

Companies that currently hold and are considering holding virtual-only annual meetings should take comfort in this decision from the SEC Staff – whether to go virtual properly remains within the purview of the company’s board of directors.  Given the potential cost savings and flexibility that can be achieved from holding virtual-only annual meetings, we expect that more companies will choose to hold virtual-only annual meetings in the near future.  Importantly, as discussed in detail in our client memo, “Planning for your Annual Shareholder Meeting:  Selected Considerations for a Virtual-Only Meeting”, before deciding to change to a virtual-only annual meeting format, companies should consult their governing documents and the laws of their state of incorporation.  In addition, in spite of HP’s successful no-action request, companies may also wish to proactively discuss the proposed change with key shareholders and explain the rationale behind holding shareholder meetings exclusively online.



23 November 2016

Proxy Advisory Firm Updates and Action Items for 2017 Annual Meetings

by Gibson Dunn

The two most influential proxy advisory firms--Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis)--recently released their updated proxy voting guidelines for 2017. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments. The 2017 ISS policy updates are available here. The 2017 Glass Lewis Guidelines are available here.

ISS 2017 Proxy Voting Policy Updates

On November 21, 2016, ISS released updated proxy voting policies for shareholder meetings held on or after February 1, 2017. These policies are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies. The changes in the 2017 proxy voting guidelines are described below.

ISS also indicated that it plans to issue updated FAQs on equity plan proposals (discussed below) and other matters in mid-December, and that it plans to issue updated voting policies on shareholder proposals anticipated for 2017 annual meetings in January 2017.

1 Director Elections

Overboarded Directors

As announced in the ISS 2016 Proxy Voting Policy Updates, ISS will begin recommending votes "against" directors who sit on more than five public company boards. Prior to this announcement and during the 2016 transition period, the maximum number of boards a director could sit on without receiving a negative ISS voting recommendation was six. The recommendations for public company CEOs remain unchanged: ISS will continue to recommend votes "against" public company CEOs who sit on the boards of more than two public companies besides their own (but only at those companies where the CEO is a director, not on the CEO's own board).

Restrictions on Shareholders' Ability to Amend Bylaws

ISS now will recommend votes "against" members of the governance committee if a company's charter places "undue" restrictions on shareholders' right to amend the company's bylaws. Undue restrictions include, but are not limited to, prohibitions on the submission of binding shareholder proposals or ownership requirements in excess of those imposed by Rule 14a-8. ISS will continue to issue negative voting recommendations each year that these restrictions remain in place. Prior to this update, ISS did not have a stated position on this issue.

Unilateral Bylaw/Charter Amendments and Multi-Class Capital Structures at IPO Companies

ISS now will generally recommend votes "against" all directors other than new nominees if a company completes an IPO with a multi-class capital structure in which the classes do not have equal voting rights.  Prior to this update, ISS recommended votes "against" directors of IPO companies if the company had provisions in its charter or bylaws that were "materially adverse" to shareholder rights, and ISS provided a list of factors that could change the presumption of a negative voting recommendation, including a public commitment to put the adverse provision to a shareholder vote within three years of the date of the IPO.

Under the new guidance, if, prior to the IPO, the company or its board adopted charter or bylaw provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights, ISS will recommend a vote "against" all directors except new nominees, unless there is a reasonable sunset provision (i.e., a commitment to hold a shareholder vote within three years will no longer be sufficient).  In addition to the sunset provision, as under its current policy, ISS will continue to consider a list of factors in making its final voting recommendation. In addition, unless the adverse provision and/or problematic capital structure is reversed or removed, ISS will recommend votes case by case on director nominees in subsequent years.

2 Capital

Stock Distributions: Splits and Dividends

ISS has a voting policy that specifically addresses common stock authorizations in connection with a stock split or stock dividend, and it has clarified this policy for 2017. In connection with a planned stock split or stock dividend, a company may need to increase the number of authorized shares of its common stock, which would require shareholder approval. The company may seek approval for a total number of shares that exceeds the number it anticipates distributing in connection with the stock split or stock dividend. As updated, the ISS policy now makes clear that ISS will generally vote "for" these proposals as long as the "effective" increase in authorized shares satisfies ISS's common stock authorization policy. As we understand it, this clarification means that, in evaluating the impact of the increase on a company's authorized share capital, ISS will continue to consider only the number of excess shares--that is, shares over and above those to be issued as a planned stock split or stock dividend.

3 Executive Compensation

Equity-Based Incentive Plans

ISS has changed aspects of its "Equity Plan Scorecard," which is part of its proxy voting policy for equity-based incentive plans. Specifically, ISS has added a factor to the Equity Plan Scorecard that considers whether dividends or dividend equivalents related to an equity award can be payable prior to vesting of the award. Under the new factor, equity plans that explicitly prohibit the payment of all dividends or dividend equivalents before the vesting of the underlying equity award will receive full credit, while companies will receive no credit if the prohibition is "absent or incomplete" (that is, it does not apply to all types of awards). A company's general practice to withhold dividends during the vesting period is insufficient to receive credit under the Equity Plan Scorecard if the policy is not made explicit in the equity plan document. A provision that allows the accrual of dividends/dividend equivalents payable upon vesting is sufficient as long as dividends are withheld during the vesting period.

In addition to adding the new factor, ISS has also changed the factor in the Equity Plan Scorecard related to minimum vesting periods. Under the updated factor, in order to receive full credit, an equity plan must specify a minimum vesting period of at least one year that applies to all award types and that cannot be overridden in individual award agreements. This is a change from the prior version of the factor, which only required that the minimum vesting period apply to one type of award and was silent with respect to individual award agreements.

Amendments to Cash and Equity Incentive Plans

ISS clarified how it will evaluate proposals to amend cash or equity incentive plans by more clearly differentiating the framework it will apply to various types of amendments. ISS's recommendation on amendments to all plans (whether cash, stock, or a combination of the two) that only seek shareholder approval of performance metrics for Section 162(m) purposes (other than in connection with the first such approval following an IPO) will depend on whether the board committee administering the plan consists entirely of independent directors. Note that for these purposes ISS applies its definition of "independence", not the applicable New York Stock Exchange or NASDAQ definition. All other cash and equity plan amendments will receive recommendations on a case-by-case basis. The amendments do not substantively change the ISS policy; they merely clarify its application.

Pay-for-Performance Updates

Separately, ISS also recently announced that it would incorporate an additional proprietary financial performance metric into the pay-for-performance analysis it uses in evaluating a company's executive compensation and say-on-pay proposal. When evaluating executive compensation, ISS currently applies a quantitative screen that uses three metrics: (a) the degree of alignment between the company's annualized total shareholder return (TSR) and the CEO's annualized total awarded compensation, each measured on a relative basis within a peer group and over a three-year period; (b) the degree of absolute alignment between the trend in CEO pay and the company's TSR over the prior five fiscal years; and (c) the multiple of the CEO's total awarded compensation relative to the peer group median CEO total compensation. This quantitative screen is intended to flag companies where a potential significant unsatisfactory long-term pay-for-performance alignment misalignment of pay and performance may exist and therefore where further assessment is warranted in the form of a qualitative pay-for-performance analysis.

Based on feedback obtained through its 2016 policy survey, ISS has announced that it will incorporate an additional pay-for-performance metric into its analysis beginning in 2017. Specifically, ISS has developed a new metric that compares the relative degree of alignment between the CEO's annualized total awarded compensation and the company's performance as calculated by ISS based on six financial metrics, with both compensation and financial performance being measured relative to an ISS-selected peer group over a three-year period. The six financial performance metrics that will be used in this analysis are (a) return on invested capital, (b) return on assets, (c) return on equity, (d) revenue growth, (e) EBITDA growth, and (f) growth in cash flow from operations. The weight that ISS places on each of these six metrics will vary by industry for purposes of producing the new numerical weighted financial performance metric. Beginning in 2017, ISS's voting recommendation reports will present this information in a new standardized table that sets forth the company's three-year performance based on TSR and on these six financial metrics relative to the company's ISS selected peer group, compares performance on these metrics with relative compensation levels (in each case, relative to the ISS selected peer group), and presents the overall weighted financial performance metric. Companies that subscribe to ISS's executive compensation services will be able to view online projections of their relative financial performance evaluation under these new measures.

For 2017, ISS stated that it may use the relative financial performance information in the qualitative aspect of its pay-for-performance analysis. Thus, no changes are being made for 2017 to ISS's quantitative pay-for-performance analysis, although ISS is leaving the door open for changes in 2018 and beyond. As with any standardized measure, some companies may object that the new financial performance measures utilized by ISS do not accurately portray their performance, and may object to the manner in which ISS weights the various financial performance measures. The extent of these objections, and the extent to which shareholders embrace the ISS presentations, may well depend on the extent of transparency that ISS provides into its proprietary financial performance calculations and to the weight it assigns to each.

4 Director Compensation

Shareholder Ratification of Director Compensation Programs

ISS has added a new policy for evaluating company proposals seeking ratification of non-employee director compensation. ISS will vote case by case on these proposals, based on a list of factors. The list of factors includes director compensation at comparable companies, the presence of "problematic" pay practices relating to director compensation, director stock ownership guidelines and holding requirements, equity award vesting schedules, the mix of cash and equity-based compensation, "meaningful" limits on director compensation, the availability of retirement benefits, and the quality of disclosure surrounding director compensation. ISS will also consider whether or not the equity plan under which non-employee director grants are made warrants support, if that plan is up for shareholder approval. This policy is being implemented in reaction to shareholder litigation over director compensation and the ensuing shareholder ratification proposals put forth by companies.

Equity Plans for Non-Employee Directors

ISS modified the factors considered when it evaluates equity compensation plans that apply solely to non-employee directors. ISS will continue to evaluate plans on a case by case basis based on the estimated cost of the plan relative to peer companies, the company's three-year burn rate relative to peer companies, and plan features. In cases where director stock plans exceed ISS plan cost or burn rate benchmarks, in making its recommendation, ISS will continue to consider various factors relating to director compensation in formulating its voting recommendation. However, rather than requiring that a company's director compensation program meet certain enumerated criteria, which is the approach under ISS's current policy, ISS will "look holistically" at all of the factors. In addition, ISS has updated and expanded these factors so they are the same factors used in ISS's new policy for evaluating company proposals seeking shareholder ratification of director compensation programs.

Glass Lewis 2017 Proxy Voting Policy Updates

On November 18, 2016, Glass Lewis released their updated proxy voting policy guidelines for 2017 in the United States and for shareholder proposals. These guidelines are a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on shareholder proposals. The four key changes in these 2017 guidelines are summarized below.

1 Overboarded Directors

As previously announced, beginning in 2017 Glass Lewis will generally recommend voting "against" a director who serves as an executive officer of any public company while serving on a total of more than two (instead of three) public company boards (including their own) and any other director who serves on a total of more than five public company boards.  However, Glass Lewis has introduced some flexibility in how it will apply this standard:

When determining whether a director's service on an excessive number of boards may limit the director's ability to devote sufficient time to board duties, Glass Lewis may consider relevant factors such as the size and location of the other companies where the director serves on the board, the director's board duties at the companies in question, whether the director serves on the boards of any large privately held companies, the director's tenure on the boards in question, and the director's attendance record at all companies.

Glass Lewis may also refrain from recommending voting "against" certain directors if the company provides sufficient rationale in the proxy statement for their continued board service.  Glass Lewis believes that this rationale "should allow shareholders to evaluate the scope of the directors' other commitments as well as their contributions to the board including specialized knowledge of the company's industry, strategy or key markets, the diversity of skills, perspective and background they provide, and other relevant factors."

If directors are overboarded, Glass Lewis will not recommend that shareholders vote "against" overcommitted directors at the companies where they serve as an executive.

2 Board Evaluation and Refreshment

Glass Lewis clarified its approach to board evaluation, succession planning and refreshment. Generally speaking, Glass Lewis believes a robust board evaluation process--one focused on the assessment and alignment of director skills with company strategy--is more effective than solely relying on age or tenure limits.  This discussion appears in a newly captioned section entitled "Board Evaluation and Refreshment" in the U.S. Guidelines and reflects a shift in focus from a similar discussion that previously appeared under the heading "Mandatory Director Term and Age Limits."

3 Governance Following an IPO or Spin-Off

Glass Lewis clarified how it approaches corporate governance at newly public entities. While it generally believes that such companies should be allowed adequate time to fully comply with marketplace listing requirements and meet basic governance standards, Glass Lewis will also review the terms of the company's governing documents in order to determine whether shareholder rights are being severely restricted from the outset.  If Glass Lewis believes the board has approved governing documents that significantly restrict the ability of shareholders to effect change, it will consider recommending that shareholders vote "against" members of the governance committee or the directors that served at the time of the governing documents' adoption, depending on the severity of the concern. The new guidelines outline the specific areas of governance Glass Lewis will review (for example, antitakeover provisions, supermajority vote requirements, and general shareholder rights, such as the ability of shareholders to remove directors and call special meetings).

4 Gender Pay Equity Shareholder Proposals

Glass Lewis codified its policy concerning shareholder proposals requesting that companies provide increased disclosure concerning efforts taken to ensure gender pay equity. Glass Lewis will review these proposals on a case by case basis and will consider (a) the company's industry; (b) the company's current policies, efforts and disclosure with regard to gender pay equity; (c) the practices and disclosure of company peers; and (d) any relevant legal and regulatory actions at the company. Glass Lewis will consider recommending votes in favor of "well-crafted shareholder resolutions requesting more disclosure on the issue of gender pay equity in instances where the company has not adequately addressed the issue and there is credible evidence that such inattention presents a risk to the company's operations and/or shareholders."

Actions Public Companies Should Take Now

Evaluate your company's practices in light of the revised ISS and Glass Lewis proxy voting guidelines: Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2017, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies.  For example, companies should consider whether any directors or director nominees would be considered "overboarded" under the updated policies.

Update ISS on your compensation peer group: ISS is inviting companies to notify it of changes companies have made to the peer companies they use for determining compensation where the company's next annual meeting will be held between February 1, 2017, and September 15, 2017. ISS factors the company-selected peer companies into its peer group construction process as part of its compensation-related voting recommendations. Companies do not need to submit an update if the peer group has not changed since the last proxy statement. ISS will automatically use the peers disclosed in a company's last proxy statement if no updates are submitted. The ISS peer submission window will be open for these U.S. companies from 9:00 AM EST on Monday, November 28, 2016 until 8:00 PM EST on Friday, December 9, 2016. Companies can submit the updates by logging onto the ISS Corporate Solutions website at https://login.isscorporatesolutions.com.

Check your ISS QualityScore Scores: In late October, ISS announced QualityScore, a rebranded and revised version of its corporate governance ratings system. Following a data verification period, ISS released on November 21, 2016, the new QualityScore ratings for companies. These scores will be publicly available on Yahoo! Finance and included in the ISS reports containing proxy voting recommendations for shareholder meetings. However, a company cannot update its QualityScore data once it files the proxy statement. Thus, companies are encouraged to review in advance the new QualityScore scores and confirm the accuracy of the raw data that ISS is using. QualityScore information can be accessed on the ISS Corporate Solutions website at https://login.isscorporatesolutions.com.

Enroll in the Glass Lewis 2017 Issuer Data Report (IDR) program: Glass Lewis has opened enrollment for its 2017 Issuer Data Report (IDR) program. The IDR program enables public companies to access (for free!) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual meetings. Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for companies to confirm the accuracy of the data before Glass Lewis's voting recommendations are distributed to its clients. Moreover, unlike ISS, Glass Lewis does not provide each company with complimentary access to the final voting recommendations for the company's annual meeting. IDRs feature key data points used in Glass Lewis's corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others. The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included. Each participating public company receives its IDR approximately three weeks prior to its annual meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis. Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis. Enrollment closes on January 6, 2017, or as soon as the annual limit is reached. To learn more about the IDR program and sign up to receive a copy of the 2017 IDR for your company, go to https://www.meetyl.com/issuer_data_report.




19 November 2016

Planning for Your Annual Shareholder Meeting: Selected Considerations for a Virtual-Only Meeting

by Gibson Dunn

In recent years, an increasing number of companies have opted to hold annual shareholder meetings exclusively online--i.e., a virtual meeting without a corresponding physical meeting--rather than a virtual meeting in tandem with a physical meeting (the so-called "hybrid" approach). While hybrid approaches are generally welcome or not opposed by investors and activist shareholders, some have criticized companies holding virtual-only annual meetings, asserting that virtual meetings limit the opportunity for shareholder participation in the meeting as well as engagement with management and the board. In spite of these criticisms, just as corporate use of the internet and social media to communicate with stakeholders is growing, virtual meetings are on the rise.

In 2001, Inforte Corporation was the first company to hold a virtual-only meeting, following Delaware's 2000 amendment to its General Corporation Law permitting such meetings.[1] Though virtual meetings are still very much a minority of total annual shareholder meetings, more and more companies have been holding virtual meetings over the last few years: 27 virtual meetings in 2012, 35 in 2013, 53 in 2014 and 90 in 2015.[2] Broadridge Financial Solutions, an investor communications firm and a provider of a virtual meeting platform, reported 136 virtual meetings held in 2016 to date,[3] with particular popularity with recently-publicly listed companies and technology companies. These include companies, large and small, such as Intel, HP Inc., Hewlett Packard Enterprise, Fitbit, Yelp, NVIDIA, Sprint, Lululemon, Graco, GoPro, Rambus, El Pollo Loco and Herman Miller.


Considerations for a Virtual Meeting

Benefits of Virtual Meetings

Virtual meetings present many potential advantages for companies and their shareholders. Advocates suggest that virtual meetings will increase shareholder participation as compared to physical-only meetings because of improved access--shareholders who cannot attend in person due to location or other reasons can attend virtually and do not have to incur the time and costs of travel to a physical meeting. As an example, one company had only three shareholders attend its last physical meeting in 2008, while 186 shareholders attended its virtual meeting in 2009.[4] In addition, considering that thousands of annual shareholder meetings are held within a few weeks of each other, shareholders can participate in more virtual meetings than physical meetings.[5]

Similarly, companies may find virtual meetings appealing in their potential to reach as many shareholders as possible. Companies can also choose among different approaches to handling shareholder questions,[6] some of which allow companies to preview and prioritize important questions, eliminate duplicative items and prepare more substantive or complete responses. Moreover, for some companies, the use of technology for the conduct of a shareholder meeting may be consistent with promoting the technology business of the company or enable a company to project a tech-savvy image.

A benefit to both shareholders and companies is the reduced cost of the annual meeting--a virtual meeting avoids the time, effort and expense of organizing a physical meeting, including reserving a large venue and arranging for appropriate personnel and materials. With companies and investors becoming increasingly global, virtual meetings can trim travel time and costs for shareholders, avoid traffic and other logistical delays and be easier to schedule amidst competing time demands. A virtual meeting may also be less disruptive to the company's daily routine, allowing management and other employees to return to their work more quickly. In the current atmosphere where physical safety is always a concern, it is relatively easy to maintain security and control for a virtual meeting as compared to a live one. Lastly, holding the annual meeting virtually can reduce environmental impact, because there would be less travel and fewer printed materials regardless of the number of participants.

Challenges Presented by Virtual Meetings

Despite the potential advantages, some perceived challenges raised by virtual meetings cause certain institutional investors, such as the California Public Employees' Retirement System (CalPERS), the largest U.S. public pension fund, and shareholder groups, such as the Council of Institutional Investors (CII), to oppose virtual meetings.[7] These investors assert that virtual meetings reduce the effectiveness of shareholder participation by eliminating shareholders' ability to meet with directors and express their concerns face-to-face. There is also concern that companies will manipulate shareholder questions to reduce any negative impact or redirect focus, by filtering, grouping, rephrasing or even ignoring questions so that companies can manage questions and their responses to advance the company viewpoints. By selecting questions ahead of time, companies could choose not to answer hard questions that would be more difficult to avoid in person. In effect, virtual meetings could potentially allow companies to limit the influence of corporate governance activists.

Companies may fear that virtual meetings lack the personal connection with shareholders and communities that in-person meetings can convey. Virtual meetings may create more uncertainty in shareholder votes because shareholders can more easily attend virtual meetings than physical meetings and thus electronically vote or change votes at the last moment while attending a virtual meeting. Especially in contested elections, the certainty of proxies received in advance of physical meetings provides more comfort for companies about the projected outcome of votes. Shareholders who can attend a meeting virtually may be less inclined to vote by proxy in advance, making voting results less predictable and making it harder for companies to gauge whether their solicitation methods are effective or need to be adjusted. In proxy contests, parties could continue solicitation efforts via e-mail up to the time of the virtual meeting, though a company's last-minute announcements or statements may similarly be more likely to affect votes. Some companies may avoid virtual meetings because of their reluctance to make their shareholder lists available online, as required by many states for virtual meetings. Moreover, without the personal touch present when face-to-face, virtual meetings may diminish companies' ability to resolve hostile or otherwise challenging questions as effectively as in physical meetings. Finally, to the extent that a virtual meeting broadcasts shareholder questions on a real-time basis, it could be more difficult for companies to manage disruptive participants than in a physical meeting.

Some prominent activist shareholders also oppose virtual meetings. For the 2017 proxy season, John Chevedden has submitted shareholder proposals to various companies requesting that the companies' board of directors adopt a governance policy to initiate or restore in-person annual meetings and publicize this policy to investors.[8] Mr. Chevedden has argued that in-person meetings serve an important function by enabling shareholders to better judge management's performance and plans.[9] Similarly, James McRitchie has written on his website about the negative impact of holding virtual annual meetings and advocated for shareholder proposals requiring physical meetings.[10]

Both CalPERS and CII believe that companies "should hold shareowner meetings by remote communication (so-called 'virtual' meetings) only as a supplement to traditional in-person shareowner meetings, not as a substitute" and that "a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees."[11] California State Teachers' Retirement System (CalSTRS) has also expressed a preference for a hybrid meeting, though it acknowledged that "the technology is moving."[12] At this time, most other major institutional investors have not taken a public stance regarding virtual meetings.

Neither Institutional Shareholder Services (ISS) nor Glass Lewis have directly opposed virtual meetings in their guidelines, although ISS has indicated that it may make adverse recommendations where a company is using virtual-meeting technology to impede shareholder discussions or proposals.

Best practices for virtual meetings are continuing to evolve as more companies hold virtual meetings, so it may be difficult to predict investor response to specific practices.


Initial Considerations in Deciding Whether to Hold a Virtual Meeting

Governing Law and Documents

If a company desires to hold its meeting virtually, it first must confirm that the law of its state of incorporation permits virtual annual meetings and the requirements applicable to such meetings. Almost half of the U.S. states, including Delaware, permit virtual meetings.[13] However, some of these 22 states include conditions that, practically speaking, mean that virtual meetings likely would not be used--for example, California permits virtual meetings but only with the consent of each shareholder participating remotely.[14] Seventeen states and the District of Columbia do not permit virtual meetings but do permit hybrid meetings, and 11 states require a physical location for the shareholders' meeting while permitting remote participation.[15]

A Delaware corporation can hold its annual meeting virtually if it complies with certain statutory requirements. The company must "implement reasonable measures" to confirm that each person voting is a shareholder or proxyholder and to provide such persons with "a reasonable opportunity to participate in the meeting and to vote," including the ability to read or hear the meeting proceedings on a substantially concurrent basis.[16] The company must also maintain records of votes or other actions taken by the shareholder or proxyholder.[17]

After confirming that virtual meetings are allowed under the state law applicable to the company, the company should make note of any statutory conditions, such as disclosure or shareholder consent requirements or objection rights. For example, as noted above, a company may also be required to make its shareholder list electronically available during the meeting.[18] A company must also confirm that its governing documents permit virtual meetings; for example, a company's bylaws often state where annual meetings are to be held and may need amendment to provide for virtual meetings. Notably, federal securities laws do not impose restrictions on how shareholder meetings are held. Similarly, while stock exchanges like the NYSE and NASDAQ require listed companies to hold shareholder meetings, they also do not prohibit nor impose restrictions on virtual meetings.

Factors Influencing the Decision to Hold a Virtual Meeting

A company should assess typical shareholder attendance at its annual meeting and the interest of senior management and directors in holding the annual meeting virtually who may have concerns about investor reaction to a virtual meeting announcement or who may want the company to demonstrate its embrace of current technology. A company should also compare the costs and logistical efforts necessary for a physical meeting against those needed for a virtual meeting, which will include fees for the virtual meeting platform and may still include travel expenses for certain directors and management team members. Other factors include whether any shareholder proposals are pending and the level of shareholder dissent, such as with respect to the company's performance or governance. The company should evaluate the risk of triggering shareholder activism if it announces an intent to hold its annual meeting virtually. There may be reasons why a physical meeting may be preferable, such as where director elections are contested or a significant business transaction or controversial proposal will be put to a shareholder vote. To date, no virtual meetings involving proxy contests have been held.


Planning for a Virtual Meeting

In 2012, a group of "interested constituencies, comprised of retail and institutional investors, public company representatives, as well as proxy and legal service providers" published guidelines for virtual meetings.[19] Chaired by a representative of CalSTRS and including members from the National Association of Corporate Directors, the Society for Corporate Governance (formerly known as the Society of Corporate Secretaries & Governance Professionals), AFL-CIO and

NASDAQ and others, this "Best Practices Working Group for Online Shareholder Participation in Annual Meetings" set forth the following principles for online shareholder participation in annual meetings:[20]

- Companies should "employ safeguards and mechanisms to protect [shareholder interests] and to ensure that companies are not using technology to avoid opportunities for dialogue that would otherwise be available at an in-person shareholder meeting."[21] Companies should adopt safeguards for shareholders' online participation by adopting policies and procedures that offer a similar level of transparency and interaction as a physical meeting. The policies and procedures should also address validation of attendees (to confirm that they are shareholders and proxyholders) and enable online voting.

- Companies should "maximize the use of technology" to make the meeting accessible to all shareholders. Steps to be considered include offering telephone or videoconferencing access "so that shareholders can call in to ask questions during the meeting," ensuring accessible technology "by utilizing a platform that accommodates most, if not all, shareholders," "providing a technical support line for shareholders," and "opening web lines and telephone lines in advance" for pre-meeting testing access.[22]

If a company decides to hold its annual meeting virtually, it may wish to proactively discuss the proposed change with key shareholders and explain the rationale for it. The company must also determine how it would handle shareholder questions--for example, whether all questions would be posted and establishing what happens to questions received during the meeting that are not answered during the meeting.

A company has several options for hosting a virtual meeting (audio, video, telephone, web, etc.), and a company's choice among those options will be guided by state legal requirements. Providers offer virtual meeting platforms on which companies can host their annual meetings and shareholders can attend and vote online. These commercial platforms can help companies comply with statutory requirements, such as Delaware's requirement to maintain records of votes and other shareholder actions. If possible, the company should leverage technology to allow attendees with different levels of technological savvy or resources to attend.



Though some originally thought that only small companies would use virtual meetings because larger, more well-known companies would want to use the annual meeting as a public relations opportunity and to avoid backlash from shareholder groups, large companies have now started holding virtual meetings. In deciding whether to hold a virtual meeting, companies should weigh the relative advantages and disadvantages applicable to their situations, which may include potential negative sentiment from investors. With technological advances that enable the meetings to be more similar to physical meetings, the potential cost and time savings of virtual meetings may appeal to more companies.


[1] See Eric Bomkamp, Virtual-Only Shareholder Meetings: Inevitable Advance or Unwelcome Development?, BNA's Corporate Counsel Weekly (February 23, 2011); Virtual Shareholder Meetings, TheCorporateCounsel.net, http://www.thecorporatecounsel.net/member/LawFaqs/ElectronicStockholder.htm#a (last visited Oct. 11, 2016).

[2] See TheCorporateCounsel.net, supra note 1; Broadridge Financial Services, Inc., 2016 Proxy Season Key Statistics & Performance Rating (based on shareholder meetings (i.e., proxy "jobs") mailed between March1, 2016 and June 17, 2016), http://media.broadridge.com/documents/Key-Statistics-and-Performance-Ratings-for-the-2016-Proxy-Season-new.pdf (last visited October 20, 2016); Richard Daly, Unless You're Warren Buffet, Your Next Shareholder Meeting Should be Online, Forbes.com (Apr. 28, 2016) http://www.forbes.com/sites/richdaly/2016/04/28/unless-youre-warren-buffett-your-next-shareholder-meeting-should-be-online/#75ebdf7d42d2; Tom Braithwaite, US companies embrace virtual annual meetings, FT.com (Mar. 11, 2016), https://www.ft.com/content/874879c0-e664-11e5-bc31-138df2ae9ee6.

[3] See Broadridge, supra note 2.

[4] See Daly, supra note 2.

[5] See id.

[6] For example, Broadridge offers companies three primary options for handling the question & answer segment of a virtual meeting: live questions submitted from shareholders via online text box, with only the company able to view incoming questions; telephone questions from shareholders during the meeting; pre-meeting questions submitted by shareholders via a separate online portal. See TheCorporateCounsel.net, Virtual Only Meetings: Nuts and Bolts (Oct. 18, 2016), available at https://www.thecorporatecounsel.net/Webcast/2016/10_18/.

[7] See Braithwaite, supra note 2.

[8] At least one shareholder proposal prohibiting virtual-only meetings was excluded under Rule 14a-8(i)(7) as relating to a company's ordinary business operations. See EMC Corp., SEC Staff No-Action Letter (Mar. 7, 2002), available at https://www.sec.gov/Archives/edgar/vprr/0202/02029901.pdf.

[9] S ee Ross Kerber, HP Moves Annual Meeting Online-Only as CEO Face Time Fades, Reuters (Feb. 12, 2015), available at http://www.reuters.com/article/hp-meeting-internet-idUSL1N0VM1XM20150212.

[10] See James McRitchie, Virtual Meetings: Can Shareholder Proposals Stem the Tide?, Corporate Governance (May 11, 2016), available at http://www.corpgov.net/2016/05/virtual-meetings-can-shareholder-proposals-stem-tide/.

[11] See Council of Institutional Investors, Corporate Governance Policies 11 (updated Apr. 1, 2015), available at http://www.cii.org/files/committees/policies/2015/04_01_15_corp_gov_policies.pdf; CalPERS, Global Governance Principals 63 (Mar. 16, 2015), available at https://www.calpers.ca.gov/docs/forms-publications/global-principles-corporate-governance.pdf.

[12] See Kerber, supra note 8.

[13] See The Best Practices Working Group for Online Shareholder Participation in Annual Meetings, Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings (June 2012), http://www.calstrs.com/CorporateGovernance/shareholder_participation_annual_meetings.pdf; see also Del. Code. Ann. tit. 8, § 211.

[14] See The Best Practices Working Group for Online Shareholder Participation in Annual Meetings, supra note 13; Cal. Corp. Code §§ 20(b), 600(a).

[15] See The Best Practices Working Group for Online Shareholder Participation in Annual Meetings, supra note 13.

[16] See Del. Code. Ann. tit. 8, § 211(a)(2).

[17] See id.

[18] See The Best Practices Working Group for Online Shareholder Participation in Annual Meetings, supra note 13.

[19] See id..

[20] See id.

[21] Id.

[22] Id.





12 August 2016

Action against Volkswagen

The public pension fund for Boston municipal employees has filed the first bondholders proposed class action against Volkswagen relating to the so called Diesel-Gate, law firm Labaton Sucharow communicated. this lawsuit claims that "false and misleading statements and omissions" by Volkswagen caused its bonds to trade at "artificially inflated prices ... only to decline after the emissions scandal went public", the law firm stated. just to remind that the top staff responsible for all capital market disclosure changed the executive's driver seat as chief financial officer to become chairman of the board. having done this two shareholder meetings in series were canceled.



30 June 2016

Shareholder Proposal Developments During the 2016 Proxy Season    

by Gibson Dunn

During the 2016 proxy season, more than 900 shareholder proposals were submitted to companies pursuant to Securities and Exchange Commission Rule 14a-8.  The season saw shareholders' continued focus on proxy access proposals and a number of new developments in decisions from the staff of the Securities and Exchange Commission on no-action requests.

This client alert provides an overview of shareholder proposals submitted to public companies for 2016 shareholder meetings, including statistics and notable decisions from the staff of the Securities and Exchange Commission on no-action requests.   

Shareholder Proposal Developments During the 2016 Proxy Season (click on link)



11 January 2016

2015 Year-End Securities Enforcement Update

by Gibson Dunn

To Our Clients and Friends:   

From at least a numerical standpoint, 2015 was a particularly productive year for the Securities and Exchange Commission's Division of Enforcement.  For the government fiscal year ended September 30, the SEC filed 807 enforcement actions, a 7% rise over fiscal 2014.[1]  Perhaps acknowledging past criticism of the use of such statistics[2]--which include more routine matters such as delinquent filings by public companies and follow-on sanctions proceedings against previously-charged securities professionals--the SEC for the first time this year broke down the numbers further, reporting 507 "independent actions for violations of the federal securities laws."  Compared to 413 independent actions in 2014, this represents a sizable leap in new enforcement actions over the past year.  Indeed, by this measure, the number of new actions in fiscal 2015 was 50% higher than the 341 filed in 2013.

As has been the case since Chair Mary Jo White and Division of Enforcement Director Andrew Ceresney took the reins in 2013, the Division predominantly touted the growth in activity involving public company reporting.  However, while the growing number of such cases was notable, most remain on the smaller size.  More significant were the number of cases against auditors, including not just individual accountants but large audit firms.  Since the collapse of Arthur Andersen, the SEC has rarely brought cases against large audit firms (aside from cases alleging auditor independence violations), but the past few months saw several significant cases, made even more dramatic by settlement terms requiring certain firms to admit wrongdoing.

Cases against investment advisers, and private fund managers in particular, continued to represent a significant portion of the enforcement docket, with cases challenging the allocation and disclosure of fees and expenses, and the disclosure of conflicts of interest, as recurring themes.  Similarly, the Division continued to pursue increasingly complex cases against broker-dealers, particularly involving alternative trading systems and market access.

Before addressing significant enforcement actions from the past six months, we take note of several overarching themes drawn from the SEC's enforcement program--not surprisingly, most of which have been dominant issues for the past few years.

I.      Significant Developments

                   A.      Administrative Proceedings Remain in the Spotlight

While the SEC's increased use of in-house administrative proceedings in lieu of federal courts for litigated enforcement actions has been one of the key SEC trends of recent years, the latter half of 2015 saw some significant developments which could turn back the tide, or at least begin the process of addressing some of the bar's concerns.

Litigants have continued to push back on administrative proceedings, and while most judicial challenges have proven unsuccessful, several recent court decisions have required the Commission to halt its administrative proceedings on the basis that the manner in which the agency's administrative law judges (ALJs) are appointed likely is unconstitutional under the Appointments Clause of the U.S. Constitution.  

As noted in our mid-year review, Judge May in the Northern District of Georgia held in June that SEC ALJs are inferior officers whose appointments likely contravene the Appointments Clause because they are not appointed by the President, a department head, or the Judiciary.[3]  Judge May's decision prompted Judge Berman in the Southern District of New York to request additional briefing from the government on this issue in Duka v. SEC, and in August, unpersuaded by the government's arguments, Judge Berman also issued an order enjoining the administrative proceeding in that case.[4]  Then, in August, Judge May issued another preliminary injunction halting the pending proceeding in Gray Financial Group v. SEC.[5]  

The SEC has given no indication that it will back down on this issue.  Instead, the SEC recently disagreed with the findings in Hill, Gray, and Duka and, in a pair of challenges to ALJ initial decisions, held that SEC ALJs are not inferior officers and are therefore not subject to Appointments Clause requirements.[6]  The Commission also appealed the decisions in Georgia and New York to the Eleventh and Second Circuits, respectively.  The Gray and Hill cases, which have been consolidated in the Eleventh Circuit, are scheduled for oral argument in February 2016, while briefs are still being filed in the Duka case in the Second Circuit. 

Nonetheless, the Commission has fended off most of the constitutional challenges by arguing that federal district courts lack jurisdiction to review such challenges pending the conclusion of the Commission's administrative proceeding.  Most recently, the Commission prevailed on such arguments in the Seventh Circuit and the D.C. Circuit, which both issued opinions finding that the Commission has exclusive jurisdiction over constitutional claims throughout the entirety of the administrative process.[7]

Given the multiple pending challenges to the legality of its administrative proceedings, the SEC appears to be pulling back somewhat.  An October 2015 Wall Street Journal report found that the SEC has reversed course in recent months, filing the vast majority of litigated cases in federal court.[8]  According to the report, the SEC filed 11% of its litigated actions instituted between July and September 2015 administratively, compared to 40% during the same period in 2014.


<click here> complete version


19 November 2015

At a November 11, 2015 meeting, the Financial Accounting Standards Board (“FASB”) voted to proceed with final revised standards for lease accounting.  The new standards would require lessees to record certain assets and liabilities for all leases with a term in excess of 12 months.  This is a departure from existing accounting standards, which require balance sheet presentation only for leases classified as capital leases.  This change is anticipated to have a significant impact on balance sheets for a broad swath of companies, potentially resulting in recognition of material amounts of lease-related assets and liabilities for many companies.  Companies and their advisors should consider now whether the new standards will affect compliance with financial covenants in existing or future debt arrangements.

FASB’s vote is the result of an extensive review and comment process initiated after the staff of the Securities and Exchange Commission issued a report in 2005 indicating that FASB should reconsider the accounting treatment for leases.  FASB subsequently issued exposure drafts of revised lease accounting standards in 2010 and 2013.

The FASB indicated that it expects to publish the new standards in early 2016.  The standards will be applicable to public companies for fiscal years beginning after December 15, 2018 and to private companies for fiscal years beginning after December 15, 2019.  Companies may elect to adopt the final standard sooner.

Although public companies will not be required to comply with the new lease standards until fiscal 2019, companies and their advisors should consider whether existing or future debt arrangements will be affected by the new standards and, if so, what steps should be taken to condition creditors, investors and analysts about the impact of the changes.  In particular, companies with significant off-balance sheet leases under current standards may find that application of the new standard significantly increases their reported assets, liabilities, amortization expense and interest expense.  These reporting changes could affect a company’s ability to comply with financial covenants, including leverage ratios and income ratios, in their outstanding credit agreements and bond indentures.  In addition, both borrowers and lenders should carefully consider the effects of implementing the new standards when negotiating and entering into new debt arrangements.

Gibson Dunn


28 October 2015

SEC Staff Reverses Longstanding Precedent on Exclusion of Conflicting Shareholder Proposals Rule;

Affirms Business as Usual on Ordinary Business Rule         

To Our Clients and Friends:   

On October 22, 2015, the Securities and Exchange Commission's ("SEC" or "Commission") Division of Corporation Finance (the "Division") issued Staff Legal Bulletin No. 14H ("SLB 14H"), setting forth a dramatically different standard for when it will concur that a shareholder proposal that conflicts with a company proposal can be excluded from the company's proxy statement under Rule 14a-8(i)(9).  The Division also reaffirmed its views on the application of the "ordinary business" standard in Rule 14a-8(i)(7).  SLB 14H is available here

I.          Rule 14a-8(i)(9)

BackgroundPursuant to Rule 14a-8(i)(9), a company may exclude a shareholder proposal if the proposal "directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting."  Since the adoption of this exclusion in 1967, the staff of the Division (the "Staff") consistently has permitted companies to exclude a shareholder proposal where the proxy statement also contained a company proposal that would "present alternative and conflicting decisions for shareholders" and "create the potential for inconsistent and ambiguous results."  However, in response to concerns raised by some shareholders over the application of Rule 14a-8(i)(9) in the context of proxy access shareholder proposals, in January 2015, SEC Chair Mary Jo White announced that she was directing the Staff to review Rule 14a-8(i)(9) and report to the SEC on its review.[1]  Concurrently with this announcement, the Staff announced that pending its review, it would no longer express a view during the 2015 proxy season on the availability of Rule 14a-8(i)(9).[2]  The Staff received 19 comment letters related to its review.[3]  We discussed these developments in detail in our January 16, 2015 blog post and July 15, 2015 client alert.

"Mutually exclusive" proposalsIn a reversal of decades of Staff interpretations of Rule 14a-8(i)(9), the Division takes the position in SLB 14H that a direct conflict exists for purposes of Rule 14a-8(i)(9) only if "a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal" because "they are, in essence, mutually exclusive proposals."  In contrast, a direct conflict will not exist if a shareholder proposal and a company proposal contain different terms but "generally seek a similar objective."  This approach is significantly more restrictive than the Staff's prior approach and, as demonstrated by the examples included in SLB 14H and described below, essentially will eliminate the availability of Rule 14a-8(i)(9) as a basis for excluding shareholder proposals. 

Examples.  As set forth in SLB 14H:

  • Proxy access.  Where a company does not allow shareholder nominees to be included in the company's proxy statement, a proxy access shareholder proposal with specific terms (such as 3% ownership/3 years/20% of the board) would not be viewed as directly conflicting with a company proxy access proposal with different terms (e.g., 5% ownership/5 years/10% of the board) because "both proposals generally seek a similar objective" (i.e., to give shareholders the ability to include their director nominees in the company's proxy statement) and thus "do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals." 
  • Vesting of equity awards.  Similarly, a shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not be viewed as directly conflicting with a company proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards.  This is because "a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan."
  • Chairman/CEO separationConversely, a shareholder proposal that asks for the separation of the roles of chairman and CEO would directly conflict with a company proposal seeking approval of a bylaw amendment that requires the CEO to be the chair at all times.

Binding vs. non-binding proposals.  The Division observes that a binding company proposal and a non-binding shareholder proposal may nevertheless directly conflict if a vote in favor of the shareholder proposal "is tantamount to a vote against" the company proposal, despite the non-binding nature of the shareholder proposal.  Where this is the case, the non-binding shareholder proposal would be excludable under the new standard announced in SLB 14H.  However, if a binding company proposal and a binding shareholder proposal would directly conflict solely because, if implemented, the proposals would present two mutually exclusive alternatives, the Division now will allow the shareholder proposal to be revised to be non-binding, and therefore not excludable under Rule 14a-8(i)(9).  

Staff discretionNotably, the standard introduced by the Division in SLB 14H is, to a large degree, highly subjective and gives the Staff discretion to speculate as to what a reasonable shareholder would view as the objective of a proposal and as to the comparability of alternative approaches to an issue, which may lead to results that are inconsistent with the views of shareholder proponents and shareholders voting on a proposal.  For example, while some shareholders have voted for proxy access proposals with a 5% ownership standard and against proxy access proposals with a 3% ownership standard, the Division's new standard represents a potentially unfounded judgment that these shareholders instead reasonably could support a 3% ownership standard. 

Similarly, in the example from SLB 14H discussed above regarding differing standards for vesting terms of equity awards, the Staff appears not to view the proposals as directly conflicting on the issue of whether a compensation committee should or should not have discretion in setting vesting terms on equity awards.  Instead, the Staff concludes that "a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan." 

The Division acknowledges that the standard it has promulgated in SLB 14H "may be a higher burden for some companies" to meet, but the Division indicates that it "believe[s] it is most consistent with the history of the rule" and its intention to "prevent shareholders from using Rule 14a-8 to circumvent the proxy rules governing solicitations."  Nevertheless, the new standard shifts the analysis away from whether there are competing views by a shareholder proponent and a company's board on how to address a particular topic.  As a result, the Division's new standard effectively creates the situation that Rule 14a-8 was designed to prevent by permitting shareholders to use the company's proxy materials to compete with the company's board on how to address any topic.  The best example of this occurred during the 2015 proxy season when, as a result of the Division declining to issue no-action letters under Rule 14a-8(i)(9), seven companies included both a shareholder proposal and a company proposal on proxy access in the company proxy statement.  In all seven of those contests between a shareholder and a company proxy access proposal, the company in its proxy statement recommended voting against the shareholder proposal and in five of those contests the shareholder proponent filed soliciting materials recommending that shareholders vote against the company proposal.[4]

II.        Rule 14a-8(i)(7) and Trinity Wall Street v. Wal-Mart Stores, Inc.

BackgroundUnder SEC Rule 14a-8(i)(7), a company may exclude from its proxy materials shareholder proposals relating to the company's ordinary business operations.  Under SEC Rule 14a-8(i)(3), a company may exclude proposals that are so vague or indefinite that neither shareholders voting on the proposal nor a company in implementing the proposal would know exactly what actions or measures the proposal requires.  As discussed in our July 15, 2015 client alert, on April 14, 2015, the U.S. Court of Appeals for the Third Circuit ruled in Trinity Wall Street v. Wal-Mart Stores, Inc. that a shareholder proposal submitted to Wal-Mart was excludable under Rule 14a-8(i)(7) and Rule 14a-8(i)(3), reversing a December 2014 judgment by the U.S. District Court for the District of Delaware.[5]

Different analyses for significant policy exception to ordinary business exclusion. The Third Circuit's three-judge panel unanimously held that the proposal was excludable under Rule 14a-8(i)(7).  The Third Circuit panel also unanimously held that the proposal did not fall within the significant policy exception to the Rule 14a-8(i)(7) exclusion, although one judge wrote a concurring opinion to explain that she applied a different analysis to reach that conclusion.  In the majority opinion, the Third Circuit employed a two-part test to assess whether the significant policy exception to the ordinary business exclusion applied, stating that "a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must 'transcend' the company's ordinary business."[6]  In contrast, the concurring opinion noted that "whether a proposal focuses on an issue of social policy that is sufficiently significant is not separate and distinct from whether the proposal transcends a company's ordinary business."[7]  On September 11, 2015, Trinity Wall Street filed a petition seeking the United States Supreme Court's review of the Third Circuit's opinion.  Wal-Mart has until November 16, 2015 to file its response to Trinity Wall Street's petition.[8]

Division's view: business as usualIn SLB 14H, the Division reaffirmed its view that its earlier determination that the Trinity Wall Street proposal properly was excludable under Rule 14a-8(i)(7) is consistent with the views the SEC has expressed on how to analyze proposals under the ordinary business exclusion.  The Division also stated that the two-part test applied in the majority opinion differs from the Division's practice, and that the Division "intends to continue to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the Division's prior application of the exclusion, as endorsed by the concurring judge, when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion."

Gibson Dunn

   [1]   The Division has not publicly issued a report to the Commission on its review other than the announcements in SLB 14H, and SLB 14H states that the Commission "has neither approved nor disapproved its content." 

  [2]   Statement from Chair White Directing Staff to Review Commission Rule for Excluding Conflicting Proxy Proposals (Jan. 16, 2015), available at http://www.sec.gov/news/statement/statement-on-conflicting-proxy-proposals.html; Division of Corporation Finance Will Express No Views under Exchange Act Rule 14a-8(i)(9) for Current Proxy Season (Jan. 16, 2015), available at http://www.sec.gov/corpfin/announcement/cf-announcement---rule-14a-8i9-no-views.html

   [3]   These comment letters are available at http://www.sec.gov/comments/i9review/i9review.shtml.

   [4]   See the Notice of Exempt Solicitation on form PX14A6G jointly filed by the shareholder proponent and another institutional shareholder with respect to AES Corp. (filed on Apr. 17, 2015), Chipotle Mexican Grill, Inc. (filed on Apr. 28, 2015), Cloud Peak Energy Inc. (filed on Apr. 28, 2015), Exelon Corp. (filed on Apr. 20, 2015), and Visteon Corp. (filed on May 20, 2015).     

   [5]   See Trinity Wall Street v. Wal-Mart Stores, Inc., No. 14-4764 (3d Cir. July 6, 2015).  Gibson Dunn represented Wal-Mart in obtaining the SEC no-action letter, before the district court and on appeal before the Third Circuit.

   [6]   Trinity Wall Street v. Wal-Mart Stores, Inc. at *50 (citation omitted).

   [7]   Id. at *3 (Schwartz, J., concurring).

  [8]   See Supreme Court of the United States, Docket, available at http://www.supremecourt.gov/Search.aspx?FileName=/docketfiles\15-323.htm (accessed on Oct. 22, 2015).


21 July 2015

Delaware Supreme Court Issues Ruling Interpreting Advance Notice Bylaws in Favor of Stockholder Seeking to Propose Business and Nominate Directors

On July 2, 2015, in Hill International, Inc. v. Opportunity Partners L.P., No. 305, 2015, the Delaware Supreme Court affirmed a Court of Chancery decision that Opportunity Partnership L.P. (the "Fund"), a stockholder in Hill International, Inc. ("Hill" or the "Company"), had complied with the Company's advance notice bylaws and thus timely submitted two business proposals for consideration and two nominees for election at Hill's 2015 Annual Meeting (the "Notice").  Accordingly, the Supreme Court held that it was proper to enjoin the Company from conducting any business at the Annual Meeting other than convening the Meeting for the sole purpose of adjourning it for a minimum of 21 days, so that the Fund had a chance to present to the stockholders its business proposals and nominations in the Notice. 


Background.  On April 30, 2014, Hill announced that it anticipated holding its 2015 Annual Meeting "on or about June 10, 2015."  The announcement went on to indicate that in order for stockholder proposals to be submitted at the 2015 Annual Meeting, the proposal had to be submitted "no earlier than March 15, 2015 and no later than April 15, 2015."  One year later, on April 30, 2015, Hill filed its 2015 Definitive Proxy Statement, which for the first time disclosed the actual date of the 2015 Annual Meeting:  June 9, 2015.  The Fund did not submit its complete Notice until May 7, 2014--approximately 7 days after the Company disclosed the actual date of the meeting.

Advance Notice Bylaws.  The Company's advance notice bylaws applicable to business proposals and nominations provided for a 30-day window for the timely submission of proposals and nominations to be considered at annual meetings--not less than 60 days nor more than 90 days prior to the meeting.  But those bylaws also contained a caveat:  "in the event that less than seventy (70) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders," referred to as the "70-day provision," then stockholders have an additional ten days starting from the date of such notice or disclosure in which to provide notice to the Company. 

Parties' Arguments.  Hill asserted that its April 2014 disclosure constituted "prior public notice" of the 2015 Annual Meeting that was given more than 70 days in advance of the date set for the meeting.  Thus, according to Hill, the usual 30-day window applied, and the Fund failed to submit its notice in that window.  The Fund countered that it did not receive notice "of the date of the meeting" (i.e., June 9, 2015) until April 2015, which triggered the 70-day provision.  Therefore, the Fund argued its May 2015 Notice was timely as it was submitted within 10 days of the Company's April 2015 announcement of the actual date of the meeting.

Judicial Resolution.  The core issue before both the Court of Chancery and Supreme Court  was whether "Hill's public disclosure in its 2014 Proxy Statement that its 2015 Annual Meeting would be held 'on or about June 10, 2015' constituted 'prior public disclosure of the date' of the annual meeting within the meaning of the [70-day provision]."   

 The Court of Chancery reasoned that given the plain language of the Company's advance notice bylaws, notice "of the date of the meeting"--not "a possible future date"--is required to avoid application of the 70-day provision.  Since the 2014 Proxy Statement failed to set the actual, specific date, it did not count as a "prior public disclosure of the date" of the annual meeting under Hill's bylaws. 

The Supreme Court agreed, holding that the "Advance Notice Bylaws are clear and unambiguous."  Thus, the Supreme Court affirmed the lower court holding that the 70-day notice provision applied, meaning that the Company had improperly refused to accept the Fund's Notice, in violation of the advance notice bylaw.

TakeawaysHill has important implications for Delaware corporations:

  • Corporations that have advance notice bylaw windows that are measured based off the date of public notice of the upcoming annual meeting should consider amending such provisions, to instead opt for a window that is measured based off the anniversary date of the prior year's annual meeting--a common formulation in public company advance notice bylaws. Such approach minimizes the risk of ambiguity and potential foot faults that could be utilized by activist shareholders.
  • Delaware courts will carefully parse advance notice bylaws and interpret them based on their plain language. 
  • Delaware courts, in parsing the language of advance notice bylaws, will often construe those bylaws against the drafter and in favor of the stockholder.
  • Stockholders of Delaware corporations, including activists, pay close attention to advance notice bylaw provisions and are not afraid to utilize ambiguities or pursue litigation to their advantage.
  • Accordingly, Delaware corporations should engage in an active and careful review and parsing of their advance notice bylaws to ensure those bylaws are free from interpretations that defeat the bylaw's intent.

Gibson Dunn



10 July 2015

SEC Issues Concept Release Seeking Input on Enhanced Disclosures for Audit Committees      

At an open meeting held on July 1, 2015, the Securities and Exchange Commission ("SEC") issued a concept release addressing the prospect of enhanced disclosures for audit committees.  The much-publicized concept release is available here and requests comment on a number of possible changes to existing SEC disclosure requirements about the work of audit committees, focusing in particular on audit committees' selection and oversight of independent auditors.  The SEC said that it has issued the release in response to views expressed by some that current disclosures may not provide investors with sufficient information about what audit committees do and how they perform their duties.  The release seeks feedback on whether certain audit committee disclosures should be added, removed or modified to provide additional meaningful disclosures to investors. 

The concept release contains approximately 75 numbered paragraphs, each of which asks a series of questions on a broad range of matters involving the audit committee's work.  As described in greater detail below, the scope of the issues addressed in the release raises the possibility that future rule changes could significantly expand the length of audit committee reports and other proxy disclosures about audit committees, require disclosure about matters that arguably are not material to investors, and lead to increased risk of exposure for companies and their audit committee members.

We encourage audit committees and their companies to review the questions in the concept release and consider commenting so that the SEC has the benefit of audit committee insights before pursuing future rulemaking.  Comments on the concept release are due 60 days following publication of the release in the Federal Register, which means the comment period likely will close in early September 2015.      

Recent Trend Toward Enhanced Audit Committee Disclosure

Although the SEC's audit committee disclosure requirements have not changed significantly since 1999, a number of large companies have voluntarily moved to enhance their audit committee-related disclosures in recent years.  These supplemental disclosures have included further details on the processes audit committees use to oversee the independent auditor, such as information about selecting the auditor, reviewing the auditor's independence, considering the tenure of the auditor, and overseeing the negotiation of the auditor's fees.  In addition, many companies have reorganized audit committee disclosures in their proxy statements, so that a package of audit committee-related disclosures – in the form of the audit committee report, the auditor fee disclosures, and the ratification discussion – appears sequentially as part of an effort to communicate more efficiently and effectively.

This evolving trend of enhanced audit committee-related disclosures has been spurred in part by requests from investor advocates and also from influential surveys and reports prepared by governance organizations.  For example, in November 2013, the National Association of Corporate Directors, the Center for Audit Quality and several other prominent governance organizations issued "Enhancing the Audit Committee Report:  A Call to Action" (available here).  The "Call to Action" report encouraged companies to voluntarily provide additional relevant disclosures about their audit committees' practices.   

SEC Concept Release

The SEC's concept release focuses primarily on enhanced disclosures about the audit committee's selection and oversight of the independent auditor.  Broadly, the release seeks comment on whether the current disclosure requirements are sufficient to help investors understand and evaluate audit committee roles and responsibilities.  More specifically, the release sets forth three main areas for potential disclosure and requests comments on questions the SEC poses related to these areas.  These three areas, which are discussed in greater detail below, focus on: (1) the audit committee's oversight of the independent auditor, (2) the audit committee's process for selecting the independent auditor, and (3) the audit committee's consideration of the independent auditor's qualifications.

1.   Audit Committee's Oversight of the Independent Auditor

Communications Between the Audit Committee and Independent Auditor 

In the release, the SEC notes that standards of the Public Company Accounting Oversight Board ("PCAOB") require the auditor to communicate with the audit committee prior to the issuance of the auditor's report about various topics, and that the audit committee report must disclose that these communications took place.  The release inquires whether new SEC rules should require:

"not just whether and when all of the required communications occurred, but also the audit committee's consideration of the matters discussed.  Such communications and related disclosures could address, for instance, the nature of the audit committee's communications with the auditor related to items such as the auditor's overall audit strategy, timing, significant risks identified, nature and extent of specialized skill used in the audit, planned use of other independent public accounting firms or other persons, planned use of internal audit, basis for determining that the auditor can serve as principal auditor, and results of the audit, among others, and how the audit committee considered these items in in its oversight of the independent auditor."

The release then lays out 11 paragraphs with specific questions on potential disclosures in this area, including whether there should be disclosures about: (a) the "nature or substance of the required communications between the auditor and the audit committee"; (b) all required communications from the auditor or some subset of the required communications, and how the audit committee considered the nature of such communications; (c) for multi-location audits, how the audit committee considered the scope of the audit, locations visited by the auditor, and the relative amount of account balances related to such locations compared to the consolidated financial statements; and (d) the extent to which additional matters (beyond those required by PCAOB and SEC rules) were discussed with the auditor and what level of detail should be required.  The release also asks about the effects of expanded disclosures on market participants, and whether expanded disclosure requirements could chill communications between the committee and independent auditor. 

Meetings Between the Audit Committee and Independent Auditor

The concept release notes that the number of audit committee meetings is already required disclosure, but inquires whether additional disclosure about meetings with the independent auditor would be appropriate.  For example, the release asks whether companies should have to disclose the frequency of the audit committee's private sessions with the auditor and the topics discussed in these sessions.

Internal Quality Review and PCAOB Inspection Reports

The concept release notes that NYSE rules require audit committees to obtain a report from the independent auditor that describes the firm's internal quality-control procedures and any material issues raised by the firm's most recent internal quality-control review or peer review.  The release asks whether companies should be required to disclose information about whether there have been discussions between the audit committee and the auditor about this report – and PCAOB inspection results – and about the nature of any such discussions.  With respect to PCAOB inspections, the release asks whether there should be disclosures about how the audit committee considered the results described in PCAOB inspection reports in overseeing the independent auditor.  The release also inquires whether there is a risk that these disclosures could undermine the confidentiality of nonpublic PCAOB inspection results.

Auditor's Objectivity and Professional Skepticism

The concept release states that "[h]eightened oversight by the audit committee of the auditor's objectivity and professional skepticism should promote greater audit quality."  To that end, the release seeks comment on: (a) whether investors would find useful disclosure about "whether, and if so, how the audit committee assesses, promotes and reinforces the independent auditor's objectivity and professional skepticism"; and (b) what types of disclosures audit committees could provide to satisfy such a disclosure requirement. 

2.   Audit Committee's Process for Selecting the Independent Auditor

Noting that the audit committee's responsibility to appoint and retain the independent auditor can involve a wide range of activities, the concept release seeks comment on a range of potential disclosures about the criteria used to assess the independent auditor and the actions the audit committee took in reaching a decision to select the auditor for the coming year. 

How the Audit Committee Assessed the Auditor

The concept release seeks feedback on the types of disclosures that could be made about the audit committee's process for evaluating the performance and qualifications of the auditor.  These include  the audit committee's rationale for selecting or retaining the auditor, a description of the audit committee's involvement in approving the auditor's compensation, the nature and extent of non-audit services provided by the auditor and the committee's evaluation of how such services impacted its assessment of the auditor's independence and objectivity, and the committee's use of any audit quality indicators in evaluating the independent auditor.

RFPs for the Independent Audit

The concept release also asks whether disclosures about any requests for proposal ("RFPs") relating to the audit would be useful to investors and the types of disclosures that companies could provide.  Among other things, the release indicates disclosures could address whether the audit committee sought proposals for the independent audit (and if so, why), the committee's process in reviewing any such proposals, and the factors the audit committee considered in selecting the independent auditor.

Board Policy Regarding Shareholder Ratification Vote

The concept release asks whether there should be additional disclosures about the shareholder vote to ratify the selection of the independent auditor.  The release asks whether it would be useful for companies to provide disclosure about whether the board of directors has a policy on shareholder ratification and about the audit committee's consideration of the voting results.  The release also seeks comment on whether auditor ratification should continue to be considered a "routine matter" for which brokers may use discretionary voting if the SEC adopts additional disclosure requirements in this area.

3.   Qualifications of the Independent Auditor

Noting that the audit committee's oversight responsibility for the independent auditor positions the committee to gain an understanding of the key participants in the audit and their qualifications, the concept release seeks comment on potential disclosures about the qualifications of both the audit firm selected by the audit committee and members of the engagement team.

Members of the Engagement Team

The concept release addresses whether to require disclosure of the names of the engagement partner and other key members of the engagement team, and if so, which members.  The release also asks what other information about the engagement team or other audit participants should be disclosed, such as the length of time individuals have served in their roles, any relevant experience and licensing status.   

Audit Committee Input in Selecting the Engagement Partner

The concept release asks whether there should be disclosure about the audit committee's involvement in the selection of the engagement partner, and if so, the nature and extent of that disclosure.

Auditor Tenure

The concept release asks whether the audit committee report should include information about the duration of the auditor's tenure with the company and if so, whether the disclosure should be limited to the number of years or address other matters.  These matters could include whether and if so, how, the audit committee considered tenure in evaluating the auditor's independence or deciding to retain the auditor.  The release also asks whether tenure information is more appropriately addressed elsewhere, such as in the auditor's opinion or a filing with the PCAOB.

Additional Requests for Comment

In addition to the three categories of disclosures discussed above, the concept release seeks feedback on a number of additional questions.  Among other things, the SEC has asked for input on: (a) whether any enhanced disclosures, if adopted, should be voluntary or mandatory; (b) whether investors would benefit from having all audit committee-related disclosures in one place; (c) where the disclosures should be made (for example, in the audit committee report within the proxy statement, elsewhere in the proxy statement, in the annual report, or on the company's website); and (d) whether to require updates to the disclosures to reflect developments that occur between proxy statements and if so, how often (for example, quarterly or more frequently). 

The release also seeks feedback on whether disclosure requirements should vary for smaller reporting companies and emerging growth companies.  Although the release does not specifically invite comment on the effect of expanded disclosures on foreign private issuers, the manner in which any potentially required disclosures may impact audit committees (or similar governing bodies) of foreign private issuers also should be considered for comment.

Initial Considerations

The SEC's concept release notes that many companies already disclose, as a matter of sound corporate governance, some of the issues discussed in the release.  For example, the concept release notes that in 2014, 13% of S&P 500 companies discussed the audit committee's consideration of qualifications, geographic reach, and audit firm expertise when appointing the independent auditor, 83% discussed how non-audit services might impact auditor independence, and 47% voluntarily disclosed the tenure of the company's independent auditor. 

Although not reflected in these data, the trend toward enhanced audit committee disclosures has principally focused on providing supplemental detail about the processes an audit committee uses during the year to fulfill its oversight responsibilities.  As reflected above, the questions presented in the release invite discussion about possible disclosures on audit committee activities that go well beyond enhanced process-oriented disclosures.  In many respects, the questions posed in the release signal the prospect of a dramatically more expansive disclosure regime for audit committees – one that, if pursued, is likely to raise concerns about increased liability and the possibility that auditor-audit committee communications and interactions might become chilled or sanitized.  For example, a number of the questions contemplate expanded qualitative discussion about the "nature and substance" of audit committee interactions and activities, including communications with the independent auditor. 

Next Steps

Given the existing scope of audit committee responsibilities, a significant expansion in the disclosure requirements creates the potential for additional burdens from a governance perspective.  Although the SEC is unlikely to propose rulemaking that embraces the full array of potential disclosures hinted at by the numerous questions in the release, rulemaking on even some of these issues could have significant consequences.  Audit committees and management thus should review the questions in the release and consider submitting a comment letter to the SEC in order to provide beneficial perspective.  This insight could help in distinguishing where a balanced line might be drawn between the current package of disclosures and a disclosure regime that could result in substantial additional disclosures without any clear corresponding benefit to investors.  Balance is needed to help minimize audit committee burdens and further the goal of avoiding disclosure overload, a goal that the SEC supports.

Comments should address which specific disclosures the company and audit committee expect to be useful to investors, as well as which disclosure items would be unhelpful, either because related existing requirements are sufficient or because the contemplated disclosure theme is unnecessary.  In addition to providing the company's stance, comments should provide supporting explanations.


26 May 2015

M&A Report - Delaware Court of Chancery Clarifies Director and Officer Advancement Rights

On May 28, 2015, Chancellor Bouchard of the Delaware Court of Chancery issued an opinion clarifying and strengthening the rights of a former director and officer to receive mandatory advancement under a corporation's charter. In Blankenship v. Alpha Appalachia Holdings, Inc., C.A. No. 10610-CB (Del. Ch. May 28, 2015), the Court held that, where a corporation has agreed to indemnify and advance defense costs to the fullest extent permitted by law, the corporation cannot later condition its advancement obligation on statements about an individual's belief that he or she acted lawfully. Instead, the only condition for advancing defense costs for conduct is the provision of an undertaking by the director or officer to repay the advanced costs if the conduct later turns out not to be indemnifiable. This decision reaffirms the strong protection of director and officer indemnification and advancement rights under Delaware law, "which supports resolving ambiguity in favor of indemnification and advancement."

Most public companies agree that they will advance defense costs to their directors and officers, subject to receipt of an undertaking to repay these costs if it is determined, at the conclusion of a proceeding, that an individual did not meet the standard of conduct for indemnification under Delaware law. To meet this standard, an individual must have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation's best interests. In addition, in a criminal proceeding, the individual must have had no reasonable cause to believe his or her conduct was unlawful.

The Blankenship case concerned the right to indemnification and advancement by Donald Blankenship, the former CEO and Chairman of Massey Energy Company ("Massey"), a coal mining business. In April 2010, twenty-nine miners were killed in an explosion at one of Massey's mines. In 2011, after Mr. Blankenship retired, Massey entered into a merger agreement with Alpha Natural Resources, Inc. ("Alpha"). After the merger, Massey sent a letter to Mr. Blankenship stating that Massey remained committed to providing "appropriate assistance with the legal defense" of its employees in connection with investigations into the 2010 explosion, and requesting that he sign a new undertaking (the "Undertaking") that would clarify the relationship. The Undertaking stated that Massey's advancement of expenses to Mr. Blankenship was contingent upon him making certain representations, including a representation that he "had no reasonable cause to believe that his conduct was ever unlawful."

Alpha's acquisition of Massey was completed in June 2011. Mr. Blankenship incurred legal expenses arising out of the government's investigation of the 2010 mine explosion, which Massey paid. This investigation led to a 2014 criminal indictment being made against Mr. Blankenship. After the indictment, Massey and Alpha determined that Mr. Blankenship had breached his representation in the Undertaking and ceased advancing the costs of his defense.

The Court held that, while the Undertaking required Mr. Blankenship to make certain factual representations before advancement could begin, it could not provide a basis for Massey to terminate its obligations to advance his legal costs. Massey's charter required Massey to advance costs to the maximum extent provided by Delaware law. The Court noted that when a Delaware corporation adopts charter provisions requiring broad, mandatory advancement, it cannot condition its advancement obligation on anything other than an undertaking to repay the expenses if it is later determined that indemnification is not available because an individual has not met the Delaware law standard of conduct. The representations in the Undertaking, such as Mr. Blankenship's good faith and reasonable belief that his conduct was not unlawful, merely served to provide reassurance to Massey before it commenced advancing funds; they could not serve as a justification for terminating advancement while Mr. Blankenship was in the middle of his defense.

The Court also concluded that Alpha was responsible for continuing indemnification and advancement costs under standard provisions in its merger agreement with Massey requiring Alpha to cover such costs for claims arising after the merger. The Court concluded that the 2014 indictment of Mr. Blankenship constituted a new claim, for which Alpha had an indemnification and advancement obligation. Moreover, the Court rejected Alpha's argument that it could impose terms and conditions on Blankenship's right to advancement, such as requiring a representation (similar to that in the original Undertaking) about not having engaged in unlawful conduct. According to the Court, other than requiring an undertaking to repay, which Blankenship had provided after the merger, Alpha could not restrict his ability to receive advancement because there was no basis for doing so under the merger agreement and the relevant indemnification language.

This case serves as a useful reminder that the Delaware courts tend to be skeptical of arguments that a corporation may condition or limit director or officer rights to indemnification and advancement during the pendency of an indemnified party's defense. Companies that wish to preserve discretion to limit these rights should draft their indemnification provisions accordingly and make this intent very explicit. If a corporation adopts broad mandatory indemnification and advancement obligations in its governing documents, which remains the predominant approach, Delaware courts will take a dim view of efforts to revoke or limit these crucial protections when they matter most. Likewise, an acquirer who agrees to provide such protections to its target's former management will be held to its indemnification and advancement obligations it agreed to in a merger. Nonetheless, directors and officers should carefully review the terms of their indemnification rights, and should avoid entering into undertakings beyond the standard undertaking to repay funds advanced in the event that it is ultimately determined that indemnification is not appropriate.

The decision can be found here.   



20 May 2015

Delaware Supreme Court Issues Ruling Clarifying Important Protections Afforded to Independent Directors

On May 14, 2015, the Delaware Supreme Court reversed two rulings by the Court of Chancery and held that a "plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct--be it Revlon, Unocal, the entire fairness standard, or the business judgment rule."  In re Cornerstone Therapeutics Inc. Stockholder Litigation, Nos. 564, 2014 & 706, 2014 (Del. May 14, 2015).

Section 102(b)(7) of the Delaware General Corporation Law authorizes stockholders of a Delaware corporation to adopt a charter provision exculpating directors from paying monetary damages that are attributable solely to a violation of the duty of care (as opposed to violations of the duty of loyalty and/or acts of bad faith).  But, based on the Delaware Supreme Court's decision in Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), some Court of Chancery decisions have declined to apply the exculpation clause with respect to independent directors at the pleadings stage in transactions involving interested directors, including controlling stockholders where the standard of review for such transactions is that of entire fairness. 

In Cornerstone, an opinion authored by Chief Justice Strine, the Supreme Court reversed two recent Court of Chancery rulings that had declined to apply the exculpatory provision at the pleadings phase, holding that "[w]hen the independent directors are protected by an exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated claim against them, those directors are entitled to have the claims against them dismissed." 

The Court's holding has important implications for directors of Delaware corporations.  The Court's decision emphasized that:

  • Independent directors are entitled to the presumption that they are motivated to do their duty with fidelity and thus are not assumed to be disloyal.  Op. at 12-13.
  • Independent directors are entitled to the full protections of an exculpatory clause adopted by a corporation pursuant to Section 102(b)(7).  Op. at 15-16.
  • Exculpated independent directors approving a transaction involving a controlling stockholder have a potent weapon in defending against shareholder lawsuits, and they will only remain in such suits where a plaintiff can plead "facts supporting a rational inference that the director harbored self-interest adverse to the stockholders' interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith."  Op. at 8.

This decision reinforces Delaware's protection of exculpated independent directors when they support "potentially value-maximizing business decisions."  Op. at 15.

The opinion is available here.



4 April 2015

SEC Brings First Enforcement Action Challenging Employee Confidentiality Agreement Alleged to Impede Whistleblowers

On April 1, 2015, the Securities and Exchange Commission announced its first enforcement action against a company for including "improperly restrictive language in confidentiality agreements," SEC Press Release 2015-54, which the SEC asserted "impede[d]" employees from reporting possible securities violations to the Commission.  In re KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015).  In a settled administrative proceeding against Houston technology firm KBR, Inc., the SEC found that the company violated SEC Rule 21F-17, promulgated under the whistleblower provisions of the Dodd-Frank Act.  That Rule provides in pertinent part that "[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement. . . with respect to such communications."  Without admitting or denying the allegations, KBR agreed to pay a $130,000 civil penalty and take other remedial actions.

The SEC's unprecedented action follows months of statements by the agency expressing concern about provisions in employment confidentiality, severance, and other agreements that the SEC has said could discourage employees from reporting possible securities violations by their employers to the Commission.  The agency has recently conducted a "sweep" of public companies', broker-dealers', and private funds' confidentiality agreements to identify potential candidates for enforcement action, and the head of the SEC's Office of the Whistleblower, Sean McKessy, has said that "bring[ing] a case" based on such agreements is "the new thing that I've got people really enthusiastic for."  Stephanie Russell-Kraft, SEC Whistleblower Head to Punish Cos. That Silence Tipsters, Law360 (Oct. 17, 2014).  In re KBR is the first such case, and confirms that the Commission intends to take an aggressive approach to interpreting and enforcing Rule 21F-17.

A question remains how far the Commission's enforcement activity will extend beyond confidentiality agreements--like KBR's--that concern internal company investigations of potential compliance concerns, as distinguished from confidentiality provisions in general employment contracts, for example.  Nonetheless, public companies and others will want to examine their existing agreements and practices in light of the SEC's reading of the Rule, while recognizing that the SEC's surprisingly broad interpretation of the Rule has not been accepted by any court, and may be at odds with companies' legitimate interests in protecting trade secrets and other confidential information.

The KBR Action And Settlement

According to the SEC's administrative order (available at www.sec.gov/litigation/admin/2015/34-74619.pdf), KBR required any employee interviewed as part of an internal investigation into potential legal violations or unethical conduct to sign a confidentiality statement.  By signing, the employee acknowledged that he was "prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department," and that "the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment."

The Commission asserted that by including this language in the confidentiality statement, the company had violated SEC Rule 21F-17.  Specifically, the SEC stated, "This language undermines the purpose of Section 21F and Rule 21F-17(a), which is to 'encourag[e] individuals to report to the Commission.'"

Notably, the SEC acknowledged that it was "unaware of any instances" in which a KBR employee had actually been deterred from communicating with the SEC, or where KBR had attempted to enforce the confidentiality agreements.  Nor was there any indication that KBR had acted with the intent to impede employees from communicating with the Commission.

According to the SEC, as part of a settlement of the enforcement action KBR has amended its confidentiality agreement to expressly provide that nothing in the agreement prohibits employees "from reporting possible violations of federal law or regulation to any governmental agency or entity," and to state that any employee making such a report did not need to seek prior authorization from or to notify the company.  Under the terms of the settlement, in addition to the $130,000 civil penalty, KBR was ordered to provide a copy of the SEC order to employees who had signed the prior confidentiality agreement and to inform them that they did not need to seek permission to communicate with the government about possible legal violations.

Confidentiality Provisions Post-KBR

The SEC's case against KBR, its recent rhetoric, and investigative activity demonstrate the agency's aggressive and far-reaching position on the permissibility of employment confidentiality, severance, and other agreements that include language seeking to prevent the unauthorized disclosure of confidential company information.  However, it should be emphasized that the SEC's action was filed as a settled proceeding, and it is far from clear that the Commission's position would ultimately be upheld if tested in a litigated case.  For example, the Commission admitted that KBR had taken no actions against whistleblowers, as well as no actions to enforce the confidentiality statements.  In fact, it appears that the only "conduct" that formed the basis for the SEC's enforcement action was KBR's inclusion of the confidentiality language in the statements; in explaining its action, the Commission said only that the confidentiality language "undermine[d] the purpose" of Dodd-Frank and the SEC's whistleblower rule.

The SEC's position is thus arguably inconsistent with the very text of Rule 21F-17, which expressly requires an "action to impede" whistleblowing activity.  Here, KBR did not take any actions that fell within the terms of the Rule.  Thus, should the SEC take further steps to enforce its sweeping position on confidentiality agreements, its position may not withstand scrutiny in the courts.

It should also be noted that the context of this first enforcement action may reflect the Commission's own recognition that Rule 21F-17 is much narrower than some of the SEC's public statements have suggested.  The agency targeted only KBR's use of confidentiality statements in internal investigations that in some instances conceivably could concern alleged securities violations--the Commission does not appear to have required the company to revise all its confidentiality agreements with employees.  This suggests that the SEC's actual enforcement activity in this area may be limited to contexts with some relationship to potential whistleblowing, rather than extending to all employment confidentiality agreements--at least for now.  Nonetheless, to avoid becoming the next test case for future SEC Division of Enforcement attacks on employee confidentiality agreements, there are several actions that companies should take post-KBR:

  • First, companies should seek legal counsel in evaluating whether, and to what extent, they should revise their employment agreements and policies to conform to the SEC's position.  Settlement agreements with "whistleblowers," for example, can appropriately carve out reporting to the government to make clear that the company is not paying the employee to prevent disclosure of legal violations.  On the other hand, companies have a legitimate interest in protecting their confidential business information, and in having the Commission follow processes that protect appropriately asserted privileges and confidentiality interests under the Freedom of Information Act, including through the use of subpoenas to obtain documents where appropriate.  Companies will want to balance these interests as they review their policies. 
  • Second, and related, companies should ensure that they do not inadvertently deter internal whistleblowing through any revisions to confidentiality language.  Internal reporting remains key to a robust culture of compliance, and is a practice the SEC has said it seeks to encourage (i.e., by providing that employees who first attempt to report potential misconduct internally may be entitled to a higher whistleblower bounty than those who go directly to the government).  Care should be taken so that employees are incentivized to report issues within the company, while doing so in a way that is not construed as improperly deterring them from contacting the government.
  • Third, companies should review their compliance programs to ensure, among other things, that they have effective and robust internal employee training and whistleblowing procedures.  Promptly and effectively responding to complaints can minimize the risk of a whistleblower seeking government intervention.  Additional training should also be provided to employees in supervisory positions to ensure that they are aware of proper practices in dealing with known whistleblowers and do not engage in activity that could be perceived as retaliatory.  While KBR signals the SEC's interest in confidentiality agreements even in the absence of retaliation, a finding that the company in fact retaliated against a whistleblower is likely to have far more serious repercussions for the company.
  • Fourth, companies should consider whether there are circumstances where it may be necessary to contest the Commission's reading of the Rule and the Dodd-Frank Act.  The Act's prohibition on whistleblower retaliation does not give the Commission the right to use whistleblowers to obtain unfettered access to company records.

*          *          *

After KBR, many employers may struggle to reconcile their need to protect sensitive business information with the SEC's broad stance on what constitutes permissible confidentiality language.  KBR is not the last word on the matter, however, and employers may be able to challenge--successfully--the SEC's position. 

Jeffrey M. Trinklein



13 February 2015

U.S. Antitrust Agencies Signal Increased Requirements for Merger Remedies

Divest more assets, find a stronger buyer, and hire--at your expense--a monitor that will scrutinize every step of the divestiture process, or the antitrust agencies will challenge the transaction in court.  That is increasingly the message that the leadership of the Department of Justice ("DOJ") and Federal Trade Commission ("FTC") are sending to merging parties seeking to clear the merger review process through a remedy.

On February 6, 2015, Bill Baer, the Assistant Attorney General of the DOJ's Antitrust Division, affirmed that "taking a harder look at remedies" continues to be an ongoing DOJ focus.[1]  Mr. Baer described DOJ's willingness to 'litigate the fix', as the Department did in the American Airlines/US Airways and AB InBev/Grupo Modelo matters.[2]  Mr. Baer also noted that DOJ "will continue to focus on obtaining effective relief where we find antitrust violations," and that he "applaud[s]" the FTC's recent announcement of a sweeping new study to assess the efficacy of its recent remedies,[3] which, as described below, strongly portends more onerous FTC remedy demands going forward.

Collectively, the policies of the DOJ and FTC have produced clear trends: 

  • Requirements that parties divest larger asset packages;
  • Demands for buyers with greater experience and resources;
  • Mandates that the merging parties complete divestitures more quickly;
  • Expanded use of "conduct" remedies that impose substantial regulatory-type requirements on parties; and
  • More frequent and expansive use of monitors. 

These actions have several important implications.  For merging parties, they can increase the cost, difficulty, and risk of addressing agency competition concerns, and may extend the time required to negotiate and implement divestiture packages.  Greater FTC and DOJ remedy demands make it more essential than ever that parties carefully evaluate the viability of an acceptable divestiture or conduct remedy prior to executing a transaction they expect to generate antitrust scrutiny.  The agencies' stepped-up approach to merger remedies also provides opportunities for third parties to acquire increasingly larger and more attractive divestiture packages.  Successfully purchasing divestiture assets can also require careful upfront planning, sometimes in collaboration with the merging parties.  More attractive divestiture packages can generate competition among potential buyers to demonstrate to the parties that they can close quickly and convince the antitrust agencies that they can rapidly, if not immediately, replicate the pre-merger level of competition.

New FTC Merger Remedies Study

On January 9, 2015, the FTC announced a proposal to conduct a retrospective study of merger remedies to "assess the effectiveness of the Commission's policies and practices regarding remedial orders where the Commission has permitted a merger but required a divestiture or other remedy."[4]  The proposed study will examine 92 merger remedies that the FTC entered into from 2006 to 2012.  For 53 of the remedies, the FTC plans to interview the buyers of the divested assets and participants in the industry, including the merged parties.  For the 15 orders involving divestitures of supermarkets, drug stores, funeral homes, hospitals and other clinics, the FTC will send questionnaires to the buyers of divested assets.  For the 24 orders involving divestitures in the pharmaceutical industry, the FTC intends to synthesize the information it has from compliance reports, monitors, and publicly available information.  The announcement says that the FTC may subpoena documents and data if needed.[5] 

If past is prologue, the study will result in the FTC further increasing the requirements that the parties need to satisfy for the Commission to accept a remedy proposal.  The FTC conducted a similar study in 1999,[6] which produced recommendations that required merging parties to enhance remedy packages, including by divesting larger asset packages and requiring buyers to "submit an acceptable business plan" for the acquired assets.  The FTC also affirmed policies that favored "divestitures of full, freestanding business units" and began requiring sellers to "facilitate the transfer of technology and knowledgeable staff to the buyer in addition to physical assets."[7]  Although the Commission maintained that these changes did not "raise[] the bar for resolving merger concerns,"[8] this claim is difficult to reconcile with the practical implications of the study's recommendations.  Moreover, in announcing its latest study, the Commission stated it would "focus on more recent orders" because many recent orders "incorporated modifications based on the prior [1999 Study]."[9]  This language signals that the Commission will evaluate whether the changes implemented after the 1999 Study have gone far enough to ensure that merger remedies are effective.

The possibility of additional remedy requirements is further enhanced by several high-profile failed merger remedies.  In particular, in late 2014, the FTC closed the books on what was widely viewed as an unsuccessful attempt to remedy the alleged reductions in competition from the Hertz-Dollar Thrifty transaction.  Two years earlier, in 2012, the FTC required Hertz to divest its low-cost brand, Advantage Rent a Car, to Franchise Services of North America, which  previously operated other rental car outfits, including Rent-A-Wreck, to ameliorate the alleged anticompetitive effects resulting from Hertz's acquisition of Dollar Thrifty.[10]  Notably, the Advantage divestiture included many of the hallmark requirements that came out of the 1999 Study:  there was a hold-separate requirement; a buyer was identified in the order (an "up-front buyer"); that buyer was an experienced rental car business operator;[11] Hertz was required to provide support and necessary assets to Advantage; and an independent monitor oversaw the divestiture.[12]  Just a year later, however, Advantage filed for bankruptcy after Hertz terminated lease agreements that provided Advantage with its rental vehicles.[13]  Advantage's bankruptcy trustee has sold many of Advantage's locations to other rental car companies already serving the same airport markets--including selling 10 of the original 72 divested locations back to Hertz and 12 others to Avis.[14]  In each of these locations, the divestiture has failed to maintain the number of competitors that were in the market prior to the merger.

The FTC is accepting comments on the proposed new study until March 17, 2015, and the study itself will likely take more than a year to complete.  But the Commission began implementing the recommendations contained in its 1999 Study even before it publicly released the study's results,[15] and we expect the Commission's remedy requirements to grow even before it announces formal policy changes stemming from the results of the new study.

   [1]   See Bill Baer, Assistant Attorney Gen. Antitrust Division, Dep't of Justice, Remarks as Prepared for Delivery at the Global Competition Review Fourth Annual Antitrust Leaders Forum: Reflections on Elements of Effective Antitrust Enforcement (Feb. 6, 2015), available at http://www.justice.gov/opa/speech/assistant-attorney-general-bill-baer-delivers-remarks-global-competition-review-fourth.

   [2]   Id.; see also Press Release, Office of Pub. Affairs, Dep't of Justice, Justice Department Requires US Airways and American Airlines to Divest Facilities at Seven Key Airports to Enhance System-wide Competition and Settle Merger Challenge (Nov. 12, 2013), available at http://www.justice.gov/opa/pr/justice-department-requires-us-airways-and-american-airlines-divest-facilities-seven-key; Press Release, Office of Pub. Affairs, Dep't of Justice, Justice Department Reaches Settlement with Anheuser-Busch InBev and Grupo Modelo in Beer Case (Apr. 19, 2013), available at http://www.justice.gov/opa/pr/justice-department-reaches-settlement-anheuser-busch-inbev-and-grupo-modelo-beer-case.

   [3]   Baer, supra note 1; see also Press Release, FTC, FTC Proposes to Study Merger Remedies (Jan. 9, 2015), available at http://www.ftc.gov/news-events/press-releases/2015/01/ftc-proposes-study-merger-remedies.

   [4]   Agency Information Collection Activities; Proposed Collection; Comment Request, 80 Fed. Reg. 2423 (Jan. 16, 2015).

   [5]   Id.

   [6]   FTC, A Study of the Commission's Divestiture Process (August 6, 1999), available at http://www.ftc.gov/reports/study-commissions-divestiture-process.

   [7]   Edith Ramirez, Chairwoman, FTC, Remarks at the ABA Retrospective Analysis of Agency Determinations in Merger Transactions Symposium: Retrospectives at the FTC: Promoting an Antitrust Agenda (June 28, 2013), available at http://www.ftc.gov/sites/default/files/documents/public_statements/retrospectives-ftc-promoting-antitrust-agenda/130628aba-antitrust.pdf.

   [8]   David Balto, Former Assistant Dir. of Policy and Evaluation, FTC, The Evolving Approach to Merger Remedies, Antitrust Report (May 1, 2000), available at http://www.ftc.gov/public-statements/2000/05/evolving-approach-merger-remedies.

   [9]   80 Fed. Reg. 2423.

  [10]   See Press Release, FTC, FTC Requires Divestitures for Hertz's Proposed $2.3 Billion Acquisition of Dollar Thrifty to Preserve Competition in Airport Car Rental Markets (November 15, 2012), available at http://www.ftc.gov/news-events/press-releases/2012/11/ftc-requires-divestitures-hertzs-proposed-23-billion-acquisition.

  [11]   Id.

  [12]   Id.

  [13]   See Reuters, Advantage to File for Bankruptcy as Hertz Cuts Car Supply, Reuters (Nov. 5, 2013), available at http://www.reuters.com/article/2013/11/05/us-advantage-hertz-bankruptcy-idUSBRE9A411O20131105.

  [14]   See Press Release, FTC, FTC Approves Franchise Services of North America's Application to Sell Certain Advantage Rent a Car Locations to Hertz and Avis Budget Group (May 30, 2014), available at http://www.ftc.gov/enforcement/cases-proceedings/101-0137/hertz-global-holdings-inc-matter.

  [15]   See FTC, A Study of the Commission's Divestiture Process (August 6, 1999), p. iv, available at http://www.ftc.gov/reports/study-commissions-divestiture-process.

Jeffrey M. Trinklein


12 February 2015

Securities and Exchange Board of India Announces New Insider Trading Regulations

On January 15, 2015, the Securities and Exchange Board of India, the securities market regulator in India ("SEBI"), announced the Securities and Exchange Board of India (Prohibition of Insider Trading Regulations) 2015 ("2015 Regulations"). The 2015 Regulations replace the earlier regulations governing insider trading in India -- the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 ("1992 Regulations"). The 2015 Regulations will become effective on May 15, 2015, i.e., four months after their notification.

The 2015 Regulations seek to (a) address the inadequacies of the 1992 Regulations; (b) establish a legal structure which conforms to global best practices and the changes brought about by the Companies Act, 2013; and (c) consolidate the changes effected by circulars, notifications, amendments of enactments and judicial precedents concerning securities laws in India since 1992.

This Client Advisory highlights the key changes effected by the 2015 Regulations to the current insider trading regime, and various related key concepts, including "connected persons", "unpublished price sensitive information" ("UPSI") and "insider". The 2015 Regulations have also introduced certain new measures including a more comprehensive code of conduct and fair disclosure along with trading plans for lawful trading by insiders.

Key Highlights

The following are some of the key changes that have been implemented by the 2015 Regulations: 

  • Scope: While the 1992 Regulations were applicable to listed companies only, the 2015 Regulations apply to listed companies as well as companies that are proposed to be listed on a stock exchange. There is no clarity as to which companies would fall in the category of 'proposed to be listed', i.e., is it a company that has filed a draft red herring prospectus?  
  • Connected Person: The definition of "connected person" has been significantly widened. The term now includes, among others (a) immediate relatives; (b) persons associated with the company in a contractual, fiduciary or employment relationship; and (c) persons who are in frequent communication with the company's officers within the definition of a connected person. This widens the definition under the 1992 Regulations, which was solely based on positions and designations of persons in relation to the relevant company. The 2015 Regulations now raise a presumption that connected persons are in possession of UPSI unless they prove otherwise. 
  • Insider: The revised definition of connected persons has resulted in the related widening of the definition of an "insider". The 2015 Regulations specify that the definition of insider includes both (a) "connected persons" (by virtue of their relationship with the company) and (b) those who are in possession of UPSI (by virtue of mere possession of UPSI). However, the 2015 Regulations permit the person having possession or access to the UPSI to prove that he was not in such possession or that he has not traded while in possession of the UPSI. 
  • Generally Available Information: The 2015 Regulations now define "generally available information". This makes it easier to identify UPSI which is any information that is not generally available information. If the information is accessible to the public on a non-discriminatory platform, like a stock exchange website, it will be construed as generally available information.  
  • Unpublished Price Sensitive Information: UPSI now includes price sensitive information relating to the company or its securities that is not generally available. The 1992 Regulations did not include information relating to securities in the definition of UPSI. The 2015 Regulations now provide a definitive legal test to determine UPSI which is in harmony with the listing agreement, while specifying a platform for lawful disclosure, i.e., the stock exchange website. There is an explicit prohibition on the communication and procurement of UPSI, except for legitimate purposes, due performance of duties (for example, by employees of the company who are in possession of UPSI) and the discharge of legal obligations. Consequently, communication and procurement of UPSI has become a distinct offence, other than for expressly exempted purposes. 
  • Disclosure Requirements: The 2015 Regulations mandate that a person in possession of UPSI who intends to trade in securities discloses such UPSI two days prior to trading. This is to ensure that such information is made available to the public for an adequate period of time before trading. The 2015 Regulations permit a company to seek disclosures from connected persons regarding their ownership of the company's securities and trading of such securities to ensure compliance with the 2015 Regulations. The 2015 Regulations also require that companies formulate a code of fair disclosure that they should adhere to, based on certain objective principles stated in the 2015 Regulations. 
  • Derivative Trading: In order to conform to the Companies Act, 2013, key management personnel and directors have been prohibited from engaging in derivative trading of the securities of the company.  
  • Safeguards: The 2015 Regulations have established safeguards to protect legitimate business transactions. The 2015 Regulations include safeguard exclusions for communication and procurement of UPSI in pursuance of transactions relating to private investment in public equity, mergers and acquisitions and off-market promoter transactions, provided that the disclosure requirements (discussed above) are complied with. These exclusions also protect trades undertaken in the absence of leaked information, recognizing Chinese walls within a company. Further, trades pursuant to a trading plan (discussed below) do not constitute an offence under the 2015 Regulations. This is an important amendment; now a due diligence of a listed company will enable a prospective purchaser to have wider access to information without any risk of it being construed as an offence under the 2015 Regulations. 
  • Trading Plan: The 2015 Regulations have formally recognized the concept of trading plans in India. The 2015 Regulations permit trading by persons who may continuously be in possession of UPSI so that they are able to lawfully trade in securities in accordance with a pre-determined trading plan for a period of at least one year. Trading plans have to comply with the 2015 Regulations and are required to be approved by the designated compliance officer. The 2015 Regulations further restrict the trading plan from including trades that are to be made twenty days prior to the end of a financial period for which results are to be declared by the concerned company. 
  • Compliance Officer: The 2015 Regulations provide for the appointment of a compliance officer, who is required to be supervised by the board of directors of the company. The board of directors is required to formulate a code of conduct based on principles of fair disclosure (set out in a schedule to the 2015 Regulations) to regulate, monitor and report trading by insiders. The compliance officer must approve trading plans and monitor their execution as well as monitor trading activity by all employees and connected persons to ensure compliance with the 2015 Regulations. 

Jeffrey M. Trinklein


13 October 2014

Starboard Value wins all 12 seats on board of Olive Garden owner Darden Restaurants

Patrons enter an Olive Garden Restaurant in Short Pump, Va., on May 22, 2014. Olive Garden is hurting itself by piling on too many breadsticks, according to an investor who is disputing how the restaurant chain is run. 

An activist investor has won all 12 seats on the board of Olive Garden's parent company, which has been struggling to win back customers at its flagship restaurant chain. while Starboard exploited the headline call: salt the pasta water!

Starboard Value slate of nominees beat out those nominated by Darden Restaurants Incorporation, according to results announced by the company at its annual meeting Friday. The hedge fund has criticized Darden's management.


3 May 2014

Shareholder Proposal to Google Calls for Greater Lobbying Disclosure

This resolution asks Google to expand disclosure on policies and procedures governing lobbying activities, as well as expenditures for direct and indirect lobbying through trade associations and tax exempt organizations. Walden Asset Management (Walden), adivision of Boston Trust & Investment Management Company, is the primary sponsor of the shareholder proposal (item #5 in Google’s 2014 proxy statement). Co-sponsors include, among other investors:Connecticut Retirement Plans and Trust Funds; The Sustainability Group of Loring, Wolcott & Coolidge; and the Unitarian Universalist Association.

The resolution is not a criticism of Googles’ lobbying activities, but rather a call for more transparency and leadership. The proponents believe that comprehensive lobbying disclosure is necessary for investors to fully assess the risks and opportunities associated with the use of shareholder funds to influence public policy.

While we commend Google for enhancements to its reporting on lobbying and political expenditures, important gaps remain, such as:

• Details of trade association payments, including the portion of dues used for lobbying andother public policy purposes;

• Lobbying expenditures by Google’s Motorola Mobility subsidiary, representing an additional $1.7 million in both 2012 and 2013; and,

• An evaluation of the strategic importance of its public policy advocacy, or how it assesses the success of these efforts related to the Internet as well as other issues they lobby on (e.g. immigration, taxes, renewableenergy, and STEM education).

Lobbying transparency is essential for Google, one of the top five corporate lobbyists in the past two years with federal lobbying expenditures exceeding $30 million (OpenSecrets.org). Over the last five years, Google’s federal lobbying expenditures increased approximately 250 percent. The company has also hired more than one hundred lobbyists and plans to open a new Capitol Hill office comparable to the size of the White House1.

Like most companies, Google states that membership in a trade organization does not equate to an endorsement of all of its positions. Nonetheless, such relationships can pose business and reputationalrisks to Google. In 2011, for example, the proposed Stop Online Piracy Act (SOPA) endangered Google’s business model. Yet Google is a member of the U.S. Chamber of Commerce,which vigorously supported SOPA.

Google, a recognized leader on corporate social responsibility, sometimes funds organizations with positions that are contrary to its own policies and commitments. For example, Google has a high profile and commendable goal to power its company entirely with renewable energy. However, the American Legislative Exchange Council (ALEC), a prominent and controversial organization that Google helps fund, has drafted and promoted legislative roadblocks to renewable energy through its opposition to Renewable Portfolio Standards bills. Additionally, the U.S. Chamber has actively lobbied against climate legislation and continues to not embrace the scientific consensus that climate change is caused by human forces. These commitments send a mixed message to all stakeholders, particularly since Google has not spoken out in opposition to the Chamber’s positioning on climate change policy.

This shareholder resolution calls on Google, one of the largest corporate lobbyists in the U.S., to extend its leadership in the public policy arena by enhancing disclosure of lobbying decision-making and activities.

Annual Meeting Information

The Annual Meeting of the Stockholders of Google Inc. will be held at the office of the Company, 1600 Amphitheatre Parkway, Mountain View, California 94043 on Tuesday, Wednesday, May 14, 2014 at 2:00 p.m. Pacific Standard Time.Link to Google’s 2014 proxy containing the company’s statement of opposition on page 55: http://www.sec.gov/Archives/edgar/data/1288776/000130817914000114/lgoogle2014_def14a.htm



9 September 2013

Proxy Access Proposals – Review of 2012

Results and Outlook for 2013

Shareholder Proposals Failed at Most Companies in 2012, but More Widespread Efforts, and Greater Success, Could Occur in 2013; Companies Should Consider Potential Advance Actions


Pursuant to SEC rule changes that took effect in September 2011, shareholders are now permitted to submit and vote on “proxy access proposals” – that is, proposals to give shareholders the right to include director nominees in the company’s proxy materials. Over 20 such shareholder proposals (half of which were binding) were submitted during the 2012 proxy season, of which only nine have come to a vote. Many of the proposals that did not come to a vote were deemed excludable from proxy statements by the staff of the SEC for a variety of technical reasons. We have included on the following page a chart of the terms and outcomes of proxy access proposals submitted to date.

The vote results from this limited pool suggest that shareholders are hesitant to approve proposals that would give a proxy access right to holders of a small number of shares, but are more supportive of proposals that have ownership requirements that are similar to the 3%/3-year threshold that would have applied under the SEC’s now-vacated mandatory proxy access rule.

With the benefit of lessons learned in 2012, it seems likely that proponents will formulate more potent proxy access proposals in the future – both by avoiding the problems that allowed companies to exclude the proposals under SEC rules and by including thresholds that will achieve broader shareholder support. Companies should begin thinking about steps to prepare for and respond to such proposals, including maintaining a dialogue with key shareholders and monitoring market trends in this area.   In addition, companies may wish to consider the terms of a proxy access provision that might be acceptable to the company.  Although there seems to be little benefit to the unilateral adoption of a proxy access provision on a preemptive basis, there may be a benefit to a company in putting its own proxy access proposal up for a shareholder vote at an annual meeting, particularly because doing so should permit the exclusion of a conflicting shareholder proposal.   We summarize at the end of this memorandum certain steps companies should consider taking, including potential terms that a company might find desirable if it were to put forth its own proxy access proposal.

Sullivan & Cromwell LLP will host a client webinar this summer to discuss proxy access, say-on-pay and other 2012 proxy season developments. Information on this webinar will be disseminated separately.









Holding Period









Norges Bank

(Binding )



1%/1 year


31% of votes cast

CME Group

1%/1 year


38% of votes cast




1%/1 year


Withdrawn in response to governance improvements


1%/1 year


SEC deemed excludable (conflicted with another bylaw)

Wells Fargo

1%/1 year


32% of votes cast



1%/1 year


33% of votes cast










Chevedden/ McRitchie/ Steiner/Monier (USPX form) (Precatory)

Bank of


1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable (multiple proposals)



1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable (vague due to 14a-8



1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable (vague due to 14a-8


Ferro Corp.

1%/2 years or 100 14a-8

holders/1 year


13% of votes cast



1%/2 years or 50 holders

of $2,000/1 year


Appears to be pending for August meeting. Proposal

omits provisions SEC found problematic. SEC denied exclusion request



1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable (multiple proposals)


1%/2 years or 50 holders

of $2,000/1 year


Appears to be pending for August meeting.  Proposal

omits provisions SEC found problematic.  SEC denied exclusion request



1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable (vague due to 14a-8





1%/2 years or 100 14a-8 holders/1 year


32% of votes cast

Sprint Nextel

1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable (vague due to 14a-8



1%/2 years or 100 14a-8

holders/1 year


SEC deemed excludable  (multiple proposals)

Various Pension Funds (Precatory)



3%/3 years


60% of votes cast



3%/3 years


56% of votes cast






3%/3 years


Withdrawn – HP to put forth proposal in 2013


D. Rudewicz/ Furlong Fund (Binding)

Cadus Corp

1%/1 year


Not voted on


2%/1 year


21% of votes cast. Issuer had adopted 5%/1 year provision.



15%/1 month


Not presented at meeting.  This was not a 14a-8

proposal – shareholder solicited separately



“Proxy access” refers to the right of shareholders to include their own nominees for director in the company’s proxy statement and on the company’s proxy card.  As a state law matter, shareholders generally have the right to nominate directors.   However, because substantially all shareholder voting occurs through the granting of proxies, as opposed to voting in person at the annual meeting, a shareholder nominee will not have a chance of being elected unless the nominating shareholder gathers proxies from other shareholders to vote for the nominee. Because creation and mailing of proxy soliciting materials (which requires the filing of a proxy statement with the SEC with specific detailed disclosures), as well as the actual solicitation effort, is very costly, election contests in which a shareholder solicits proxies have been relatively infrequent.

Vacating of Mandatory Rule. The SEC has, at various times, sought to allow a qualifying shareholder to include nominees in the company’s proxy materials, thereby avoiding the cost to the shareholder of preparing and mailing materials.  Most recently, in August 2010, the SEC adopted Rule 14a-11, a mandatory proxy access rule, which would have allowed shareholders (or groups of shareholders) who have held 3% of the company’s voting securities for a three-year period to include director nominees in the company’s proxy materials.

Rule 14a-11 was subject to legal challenge by business groups shortly after its adoption, and the SEC stayed effectiveness of the rule (and all related rules) in October 2010.  In July 2011, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11 in its entirety, holding that the SEC did not adequately assess its costs and benefits.1   The SEC determined not to appeal this decision, and the SEC chairman has indicated recently that the Agency does not intend to pursue a mandatory proxy access rule in the near future.

Change to Rule 14a-8(i)(8). Rule 14a-8 permits shareholders who have owned at least $2,000 of shares of a company’s common stock for at least one year to include shareholder proposals in the company’s proxy statement.   In adopting Rule 14a-11, the SEC also amended Rule 14a-8(i)(8), the so-called “election exclusion.”  Prior to the revision, this provision allowed a company to exclude a shareholder proposal that related to the company’s election or nomination procedures.  The amendment to Rule 14a-8(i)(8) narrowed this provision so that it allowed exclusion only of proposals that related to specific elections.  The change to Rule 14a-8(i)(8) survived the vacating of the mandatory access rule, and went into effect in September 2011.2

The effectiveness of the change to Rule 14a-8(i)(8) set the stage for so-called “private ordering” in the area of proxy access – that is, the development over time of a market standard or a range of market standards arising from the interplay of shareholder pressure and company reactions.  Beginning with the 2012 proxy season, shareholders are now able to submit proposals under Rule 14a-8 that seek to cause the company to adopt proxy access bylaws.

Precatory vs. Binding Proposals. Shareholders may submit proxy access proposals either in the form of a “precatory” proposal requesting the board to adopt proxy access provisions, or in the form of a direct binding proposal that actually amends the bylaws to add proxy access provisions (because shareholders may, under the law of most states, amend the bylaws unilaterally).   Shareholders have, in the past, tended not to advance governance-related proposals as binding bylaw amendments, largely because this requires them to draft the actual language of the bylaw amendment in a way that works with and is tailored for the company’s governing documents.  In addition, many institutional investors are more likely to favor precatory proposals, because they believe that companies should be in charge of drafting specific bylaw language.  Some shareholders, however, prefer to make binding proposals, because it prevents companies from diluting the impact of the proposal through nuances in drafting.

It should be noted that, if the board does not implement a successful precatory proposal, then the directors may face negative vote recommendations in subsequent years. For example, under the policies of Institutional Shareholder Services (“ISS”), the proxy advisory firm, directors will face negative vote recommendations if a precatory proposal receives the support of a majority of the outstanding shares, or receives the support of a majority of votes cast twice in three years, and the board does not implement the proposal in a way that ISS deems “responsive.”


The following is a summary of the various forms of proxy access bylaws that were submitted for the 2012 proxy season:


Terms  of  Proposals. Norges  Bank  Investment  Management,  which  manages  the  Norwegian government pension fund, submitted a number of binding bylaw amendments that would give a proxy access right to a shareholder or group that holds 1% of the outstanding stock and has held those shares for at least one year. Each eligible shareholder or group would be permitted to nominate up to 25% of the board.   There is no overall limit on the number of nominees, though the number of access nominees actually elected to the board cannot exceed 25% of the board.

Selection of Issuers. Norges Bank, in its public filings and statements, indicated that it submitted proposals to S&P 500 companies that  it  believed had  governance practices that  were  in  need  of improvement.3  However, the specified governance deficiencies are, in some cases, nearly universal practices among U.S. public companies, such as the ability to issue blank check preferred stock and the right of the board to amend the bylaws unilaterally.  Other specified governance problems at selected companies include combining the role of CEO and chairman, multiple share classes, lack of majority voting in director elections, lack of a shareholder right to act by written consent or call special meetings, and failure to implement (or to announce a plan to implement) successful shareholder proposals from prior years.  Norges Bank also made statements indicating that they viewed efforts by a company to seek to exclude a shareholder proposal under SEC rules as a negative governance practice.  Finally, in some, but not all, cases, Norges Bank highlighted that the company’s five-year total shareholder return was lower than at peer firms.

Norges  Bank  withdrew  its  proposal  at  one  company,  Pioneer  Natural  Resources,  after  the  board approved the adoption of majority voting and destaggering of their board.  It is not clear from company statements whether these actions (which were responsive to shareholder proposals on these topics that had passed in 2011) were in response to the Norges Bank proposal or dialogue with other shareholders, but Norges Bank stated that it viewed the actions as a successful outcome of their proposal.

Norges Bank Publicity Efforts. Norges Bank engaged in a number of novel publicity efforts in support of its proposals, which gave it the ability to make more detailed and expansive arguments than it could include  in the proxy  statement  under  SEC  rules, which  provide  a  500-word  limit  for  proponents’ supporting statements. First, Norges Bank included a link in each proposal to a website that had extensive, company-specific arguments in favor of their proposal.  As noted below, the SEC staff viewed this reference  to  external materials  as  permissible.    Second,  Norges  Bank  filed  a  detailed  slide presentation on the SEC’s Edgar system under Rule 14a-6(g).  Filings under Rule 14a-6(g), which show up on the company’s Edgar website under form PX14A6G, are required by SEC rules if a holder of more than $5 million in stock engages in an exempt solicitation.   It is unclear whether Norges Bank was required to make these filings under SEC rules, but an increasing number of shareholder proponents have used these filings on a voluntary basis, as a way of gaining broader publicity for their arguments in support of their proposals.4

Company Exclusion Efforts. Most companies that received the Norges Bank proposal submitted exclusion requests to the SEC staff, arguing that the proposal was excludable as vague and indefinite because the internet address referenced in the proponent’s supporting statement did not lead to an active webpage. The  SEC  staff  disagreed,  noting  that  the  proponent  provided  the  companies  with  the information that would be on the webpage upon filing of the proxy statement, and that the companies did not allege that the webpage material was materially false or misleading.  See letters to  Charles Schwab, Wells Fargo and Western Union.5

The only company that was able to exclude the proposal under SEC rules was  Staples, and this was as a result of a drafting error in the proposal – a demonstration of the danger to proponents of submitting proposals in the form of binding proposals.  In particular, the proposal failed to remove or qualify a statement in the existing bylaws that expressly disclaimed any shareholder right to include a nominee in the company proxy statement, and the SEC staff agreed that the resulting inconsistency made the proposal vague and indefinite.

Voting Results. The Norges Bank proposal failed at all the companies where it came to a vote, garnering the support of between 31% and 38% of shares voting, despite receiving a “for” recommendation in all cases from ISS.6   It seems likely that many institutional investors believed that a 1% threshold is simply too low.7


Terms of Proposals. The most common form of proxy access proposal this year was based on a model issued by the United States Proxy Exchange, a shareholder advocacy group, which was tailored and submitted to a number of companies by individual shareholder activists.   This precatory proposal requested a bylaw amendment permitting holders of 1% of the outstanding stock for a two-year period, or alternatively 100 holders who satisfy the $2,000/one-year requirement of Rule 14a-8, to include director nominees in the company’s proxy statement.  The proposal would permit each eligible shareholder or group to nominate up to one-twelfth of the board, but had no overall limit on nominees or elected access directors.  The proposal also provided that the company and its directors and officers could not consider the election of a majority of access nominees to be a “change in control.”

Company Exclusion Efforts. Every company that sought to exclude this proposal under SEC rules was successful in doing so. The SEC staff agreed with the companies that this proposal could be excluded on two separate bases:

  • The proposal constituted multiple proposals in violation of Rule 14a-8(c), due to the inclusion of the provision stating that an election of proxy access nominees would not be a “change in control” of the issuer. See letters to  Bank of America, Goldman Sachs and Textron.

Following the issuance of these SEC no-action letters, the U.S. Proxy Exchange issued a new form of proposal that eliminated the reference to Rule 14a-8 and the problematic “change of control” provision, and also reduced the 100 holder provision to 50 holders. According to the U.S. Proxy Exchange, proponents have submitted this form of proposal to Medtronics and Forest Laboratories. Both companies submitted exclusion requests to the SEC staff, arguing alternative bases for exclusion, but the exclusion requests were denied.

Voting Results. This form of proposal has come to a vote at only two companies – Ferro Corporation and Princeton National Bancorp – and received the support of 13% and 32% of the votes cast, respectively.  ISS recommended against the proposal, noting that the 100 shareholder provision could allow a nominee supported by shareholders holding as little as $200,000 in shares, which represents a negligible percentage of the company.


Terms of Proposals. A coalition of state and municipal pension funds submitted precatory proposals at Nabors Industries and Chesapeake Energy – two companies that have been the subject of significant shareholder scrutiny and criticism – seeking to create a proxy access right for 3% shareholders (or groups) who have held their stake for at least three years.  These thresholds are the same as those that would have applied under the SEC’s now-vacated mandatory proxy access rule.

Selection of Issuers. The proposals submitted at Nabors and Chesapeake detail the perceived governance failings that spurred the submission of the proposals, including excessive CEO compensation and low shareholder support for the say-on-pay vote and for certain directors in 2011.

Voting Results. These proposals passed at both Nabors (with the support of 56% of votes cast) and Chesapeake (with the support of 60% of votes cast).  These companies have been experiencing above average levels of negative shareholder sentiment (for example, each company failed to receive majority approval of their 2012 say-on-pay vote), and it is possible that a 3%/3-year proposal would receive less support (and might fail) at other companies.  Nevertheless, it seems likely that a proposal such as this one, which tracks the thresholds that the SEC sought to impose under its mandatory access rule, would achieve a significant level of support at many companies that did not already have any proxy access provisions at all Hewlett-Packard Withdrawn Proposal. A similar 3%/3-year precatory proposal was submitted to Hewlett-Packard by Amalgamated Bank, but was withdrawn when Hewlett-Packard agreed to put its own 3%/3-year proposal up for a vote at the 2013 annual meeting.


The final set of 2012 proxy access proposals consists of three different binding proposals advanced by the Furlong Fund LLC and its founder at relatively small companies.

Binding 2% Proposal. KSW, Inc. received a binding 2%/1-year proposal from the Furlong Fund.  The proposal would have limited each nominating shareholder or group to one nominee, but had no overall cap on nominees. KSW argued to the SEC staff that it should be permitted to exclude the proposal because it was “substantially implemented” under Rule 14a-8(i)(10) by the company’s adoption of a bylaw granting proxy access to 5% shareholders who had held for one year.  The SEC staff disagreed, noting the differences between the proposal and the bylaw adopted by the company.

The outcome may have been different if KSW had been putting its own proxy access proposal up for a shareholder vote at the annual meeting.  Under existing SEC staff precedents, if a company is actually putting its own proxy access provision to a shareholder vote at the upcoming annual meeting (which was not the case for KSW), then the company should be able to exclude a shareholder proxy access proposal as “conflicting” with the company’s proposal under Rule 14a-8(i)(9), notwithstanding differences between the company proposal and the shareholder proposal.

In any event, the proposal went to a vote at the KSW annual meeting and received the support of only 21% of votes cast – a lower level of support than all but one of the 1% or 3% proposals received by other companies.  Although it is difficult to draw conclusions from a single vote, it seems likely that a number of shareholders deemed the 5% proxy access right adopted by the company to be sufficient.

Binding 1%/1-year Proposal. Cadus Corporation received a binding 1%/1-year proposal from the managing member of the Furlong Fund.  Like the KSW proposal, the Cadus proposal would have limited each shareholder or group to one nominee.  This proposal was not, however, presented for a vote at Cadus’s June 21 annual meeting.

Binding 15%/1-month Proposal. The Furlong Fund had also included a proxy access proposal as part of a proxy contest for board seats at Microwave Filter.  The proposal was for a bylaw amendment providing a proxy access right to any 15% shareholder who had held for one month.  This was not a Rule 14a-8 proposal to be included in the company’s proxy statement, but rather a com ponent of a contested election set forth in the dissident’s own proxy filings.  Ultimately, the proponent’s director candidates, and the proxy access proposal, were withdrawn and not voted on at the meeting


The 2012 proxy season will likely be viewed as the start of a learning curve for shareholders and companies in the area of proxy access.  Although the vast majority of proxy access proposals were either excluded under SEC rules or voted down by shareholders, the 2012 proxy season has given shareholder activists valuable information on how to craft proposals that have a better chance of success.

Engage with Shareholders. In anticipating the receipt of proxy access proposals for the 2013 proxy season, companies should consider the best ways to gauge the views of their largest shareholders on proxy access provisions, including their general views on the principle of proxy access, as well as specific provisions that they would or would not support.  This background will be invaluable to management and the board in assessing how to deal with any proposals that are received.  A number of institutional investors have expressed concern over proxy access proposals that have low thresholds or otherwise may be subject to abuse. 8

Consider Early Announcements of Governance Enhancements. As discussed above, many companies  became  the  target  of  proxy  access  proposals  because  of  perceived  deficiencies  in governance practices or structures.  To the extent a company is anticipating any actions that would be seen by shareholders as governance enhancements (such as adopting majority voting or destaggering the board), the company should consider announcing this action in the fall, before shareholder proposals are received, because it may have the side benefit of removing the company from the list of proxy access proposal targets.

Preemptive Adoption of Proxy Access Has Limited Benefits. Companies that wish to be in the forefront of governance practices might be drawn to the idea of adopting their own proxy access provisions unilaterally.  This approach presents significant difficulties at this stage, and may have limited benefits.  In the near term, there will be limited guidance as to how market practice will develop, and the terms that should be adopted. Proxy access bylaw provisions that are appealing to the company may not be appealing to shareholder activists, and the adoption by a company of its own proxy access provisions will not prevent shareholders from submitting proposals under Rule 14a-8(i)(8) to amend the company- adopted bylaw.  For these reasons, there does not appear to be much benefit in acting preemptively and unilaterally, and few companies are expected to do so.  The only way this approach would seem to be acceptable and not open to significant criticism would be if the company were to adopt provisions substantively identical to now-vacated Rule 14a-11.

Evaluate Standard SEC Exclusion Bases. The SEC no-action letters issued in the 2012 season serve as a reminder that proxy access proposals will not be afforded special treatment under the SEC rules and will continue to be subject to exclusion under the traditional bases set forth in Rule 14a-8, as applicable. Upon receiving a proxy access proposal (or any other Rule 14a-8 proposal), companies should work with counsel to identify any viable grounds for exclusion, and should work with their investor relations team to determine whether appropriate shareholder engagement efforts might lead to the proposal being withdrawn.

Consider  Potential  Conflicting  Management  Proposal. If  a  company receives  a  proxy  access proposal that it believes has a reasonable chance of passing in 2013, that has terms the company does not support (particularly a binding proposal), and that the company is not able to get withdrawn through dialogue with the proponent, one option would be for the company to submit its own proxy access bylaw and/or charter amendment for shareholder approval at the 2013 annual meeting.  Under SEC Rule 14a-8(i)(9), a shareholder proposal can be omitted from the proxy statement if it conflicts with a company proposal being submitted for shareholder vote at the same meeting.9

This company proposal would likely be in the form of a bylaw and/or charter amendment adopted by the board, but with its effectiveness conditioned on receiving shareholder approval. This is a similar construct to that used in the context of special meeting proposals in recent years.  The increased prevalence of shareholder rights to call special meetings at U.S. public companies can be largely attributed to the receipt by companies of shareholder proposals on this topic.  However, the actual contours of the rights granted to shareholders have developed through management proposals, which contain various provisions designed to prevent abusive, wasteful or frivolous use of the right.

A similar dynamic could occur in the proxy access context – if shareholders begin to advance proxy access proposals that have a reasonable chance of passing, then companies may propose implementing provisions that have reasonable terms designed to prevent abuse.   Companies may want to begin thinking now about the potential terms that a management proxy access proposal would have.   If the company finds itself in the position of wanting to put forward a proposal at the 2013 annual meeting, there will be little time for management and the board to arrive at suitable terms. In particular, companies might want to consider such terms as the following:

  • Ownership threshold.   For example, companies may decide that 5% is an appropriate threshold, because then the company and other shareholders would benefit from the disclosure requirement imposed on 5% shareholders or groups by the SEC’s Section 13(d) and (g) rules.10
  • Definition of ownership. Companies should consider whether ownership levels should be measured on a “net long” basis (that is, net of short sales, derivative hedges and other short provisions), in order to ensure that the nominating shareholders have a true economic stake in the shares that they hold.
  • Deadline for notice. The company’s existing advance notice bylaws may not provide a sufficient amount of time for the processing of candidates to be included in the company’s proxy statements.  Companies may determinate that the deadline for notice should be earlier – for example, within a 30-day window ending on the Rule 14a-8 120-day deadline.
  • Treatment  of   incumbent  access  directors. Companies  should  consider  whether incumbent directors who were access nominees should count against the maximum number of nominees for a number of years after their election, to prevent the company from having an incentive not to renominate them.
  • Nominee  eligibility. A  management-proposed proxy access provision might include a number of reasonable eligibility standards for access nominees, including independence under relevant stock exchange standards, eligibility for committee memberships, and the completion of a standard directors’ questionnaire.
  • Director qualifications. Even prior to the proposal of a proxy access provision, companies should consider whether to adopt bylaws setting out minimum qualification standards, or disqualification standards, that the company would apply to all its directors – for example, satisfaction of certain regulatory requirements, or prohibition on affiliations with competitors or conflicts of interest.  Having such provisions in the bylaws may be helpful when proxy access is a possibility, because the company might then be faced with director nominees who were not subject to the nominating committee approval process. The adoption of such qualification provisions at a time when the company is faced with an actual shareholder nominee would likely attract greater scrutiny due to concerns of entrenchment – therefore, there is some benefit to doing so at an earlier stage.
  • Required Information. The company’s bylaws may provide for the provision of reasonable information about the candidate and the nominating party, similar to what is called for by typical advance notice provisions.  In this regard, it should be noted that the SEC’s Schedule 14N, which was adopted in conjunction with Rule 14a-11, remains in effect and would apply in the case of a nomination under a company proxy access bylaw. The company bylaw should be drafted to work in conjunction with Schedule 14N.
  • Other limitations. Companies may determine to place reasonable limitations on the use of proxy access, including making it unavailable in a year where there is already a proxy contest in place, or restricting the resubmission of failed candidates who receive below a specified threshold of support.

We have worked with a number of clients on considering the terms of potential proxy access provisions, and have developed forms of term sheets, sample proxy access bylaws and other materials that can be tailored for a particular company’s circumstances.  Please contact any of the lawyers listed at the end of this memorandum, or any other Sullivan & Cromwell lawyer you work with, if you are interested in discussing this matter further.

  1. See Business Roundtable and Chamber of Commerce of the United States of America v. SEC, 647 F.3d 1144 (D.C. Cir. 2011).
  2. See Facilitating Shareholder Director Nominations; Notice of Effective Date, Rel. Nos. 33-9259, 34-65343, IC-29788 (Sept. 15, 2011), available at  http://www.sec.gov/rules/final/2011/33-9259.pdf.
  3. See,    e.g.,    Norges    Bank    Investment   Management,   Proxy    Access    Proposals,   Investor Presentation, filed via Edgar under SEC Rule 14a-6(g), available at http://www.sec.gov/Archives/edgar/data/72971/000095015912000203/px14a6g.htm.
  4. Forty-five different companies have been the subject of PX14A6G filings so far in 2012, compared to 24 companies in all of 2011 and 21 in all of 2010.
  5. Western Union had initially advanced an alternative argument that the shareholder proposal was excludable under Rule 14a-8(i)(9) as conflicting with the company’s own proxy access proposal, which it intended to put to a shareholder vote at the 2012 annual meeting.  The company withdrew this argument, however, when it decided that it would not, in fact, advance its own proxy access proposal this year.
  6. ISS maintains that it does not have a bright line policy on proxy access proposal, but reviews them on a case-by-case basis, in light of the company’s shareholder base and the terms of the proposal.
  7. For example, the 2012 proxy voting policies of T. Rowe Price indicate that they support proposals suggesting an ownership level of at least 3%.
  8. For example, as mentioned above, the  2012 proxy voting policies of T. Rowe Price indicate that they support proposals suggesting an ownership level of at least 3%.  In addition, a governance expert at Blackrock has indicated their view that “any company establishing a proxy access process must have sufficient protections in place to avoid its abuse.”
  9. It should be noted that in a very limited number of situations, the SEC staff has refused to allow a company to exclude a conflicting shareholder proposal under Rule 14a-8(i)(9) when the company expressly acknowledged that it was submitting its own proposal as a reaction to receiving the shareholder proposal.  See, e.g., Genzyme Corp. (Mar. 20, 2007).   However, in recent years, the SEC staff has not followed this view, despite the objections of shareholder proponents.
  10. The SEC had adopted an exception from the loss of passive Schedule 13G status for shareholders who formed a nominating group under Rule 14a-11.  It should be noted that, by its terms, this exception would NOT be available for shareholders acting to form a group under a company proxy access bylaw. See Exchange Act Rule 13d-1(c)(1).




VIPsight Archives America - USA


8 August 2013

2012 Say-on-Pay Votes:  Fulfilled Expectations, Though Not Without Surprises

By Shirley Westcott

This year’s mandatory Say-on-Pay (SOP) brought new challenges for issuers.  Not only did the pace of failed plans accelerate, but last year’s votes proved to be a poor indicator of how companies’ plans would fare this season.  This report, which will be updated at the conclusion of the calendar year, will point out some high-level trends in the voting data for companies with low SOP votes so far this year.

Although receiving at least 50% support on SOP is the primary goal for issuers, in many cases the institutional investor community will apply heightened scrutiny to compensation plans that received “significant” opposition.   Thus, the data set we reviewed in this report—shown in Appendix A—covers plans that received less than 70% support.   Following our analysis of these data is a brief section on guidance for issuers, both how to recover from a failed SOP vote in 2012 and how to prepare for 2013.

Failed SOP Votes

Through June 25, 2012 annual meeting dates, 53 SOP proposals had been rejected by shareholders (2.4% of the total), up from 37 (1.4% of the total) for the same period last year.1   Among these were 12 S&P 500 companies, double the number of S&P 500 firms that failed SOP in 2011.2

The magnitude of dissent has also increased.  To date, 10 SOP proposals have received less than 30% support, with the lowest levels recorded at Digital River (19.2%) and Chiquita Brands International (19.8%).  During all of 2011, only two companies received less than 30% support on SOP:  American Defense Systems (11.1%) and Regis (28.9%).

Most companies whose SOP proposals were rejected last year addressed shareholders’ concerns and made meaningful changes to their pay programs, thereby garnering high approval this year.  To date, only four companies have had their plans voted down for two consecutive years:  Kilroy Realty, Hercules Offshore, Nabors Industries, and Tutor Perini.

This season’s surprise, however, has been the number of companies whose compensation plans sank from stellar to dismal support levels in only a year, Citigroup being the most highly publicized example. To date, 61 companies have seen their SOP approval levels plunge from over 90% in 2011 to below 70% in 2012, including 13 plans that failed.  This reversal of fortune can be partly attributed to the influence of proxy advisory firms, particularly Institutional Shareholder Services (ISS).

Cooper Industries, International Game Technology, Mylan, Nabors Industries, NRG Energy, Pitney Bowes and Simon Property.  The six S&P 500 firms that failed SOP in 2011 are Freeport-McMoRan Copper & Gold, Hewlett-Packard, Jacobs Engineering, Masco, Nabors Industries, and Stanley Black & Decker.

Advisory Service Recommendations

Although  the  impact  of  the  major  proxy  advisors’  recommendations  on  executive  pay  has  been documented in several studies (discussed below), this year it appears more pronounced.  Through June 25, 91% of the companies that received less than 70% approval on SOP had also been issued a negative opinion by ISS, compared to 87% for the same period in 2011.  Over half of these companies (64%) received an unfavorable recommendation from both ISS and Glass Lewis.

Similarly, as in 2011, virtually every failed SOP vote this year was opposed by ISS.  The only exceptions were at First California Financial Group, InSite Vision, and Safety Insurance Group, whose plans were voted  down  despite  being  endorsed  by  ISS.    However,  two  of  these  companies  have  significant ownership by hedge funds or private foundations, and the third (Safety Insurance Group) received a negative   SOP   recommendation   from   Glass   Lewis.      Although   Glass   Lewis   has   rejected   fewer compensation plans this year than in 2011 (15.4% vs. 17.4%), its influence has contributed to the high SOP failure rate. Of the 53 plans that have failed to date, Glass Lewis vetoed 47.

This year, issuers are feeling the repercussions of ISS’s new Pay-for-Performance (PFP) model, which went  into  effect  for  February  annual  meetings  onwards.    Under  its  revised  methodology,  ISS  is evaluating CEO pay and total shareholder return (TSR) performance on both a relative and an absolute basis.   The relative analysis ranks CEO pay and performance against peers over one and three years, while the absolute analysis examines the trend in CEO pay and performance over five years.  Moreover, instead of employing standardized GICS peer groups, ISS has developed smaller (14-24 company) peer categories based on market capitalization, revenue, and industry.

Although ISS’s new PFP methodology has produced about the same percentage of negative SOP recommendations as in 2011 (12%), the plans it is singling out for “no” votes has changed dramatically. Nearly two thirds of the companies that received a negative ISS recommendation this year had received a favorable ISS opinion on SOP last year, and a majority had also received strong investor support (over

80%) in 2011.  This has been particularly unsettling for issuers whose compensation programs were unexpectedly voted down this year.  Of the 53 plans that have failed so far in 2012, nearly half (22) had received over 80% shareholder support last year, and 13 had received over 90% support.  One such company, Tower Group, observed in its 8-K filing that its executive compensation policies and programs had not substantially changed since the previous year.  In fact, its CEO’s compensation was 40% lower than the previous year due to reductions in his annual cash and equity bonus.

Arguing with the Advisors

Many companies caught off guard by a negative proxy advisor opinion countered with supplemental proxy filings to better explain their compensation programs to investors.  In many cases, they pushed back at the proxy advisors’ methodologies, most often disputing their choice of peer groups, or took issue with errors in their reports.  Indeed, one company (Invesco) received a favorable recommendation from both ISS and Glass Lewis, yet still filed a supplemental proxy statement, noting that while the proxy advisors “reached the correct result,” ISS should have employed a more appropriate peer group, while Glass Lewis should have disclosed its comparators.

Proxy Advisor Policies – Don’t Ignore Them

Notwithstanding criticisms of their methodologies, the reality is that mandatory SOP has compelled more investors to rely on proxy advisors’ research to contend with the sheer volume of proxy voting.  A recent survey conducted by the IRRC Institute and Tapestry Networks of 19 North American asset managers found that most make use of proxy firm data to assist with their voting decisions on SOP.3

Proxy advisors’ policies on executive compensation have also shaped corporate behavior.  In a March 2012 survey of 110 large and mid-cap companies conducted by The Conference Board, NASDAQ OMX Group and Stanford University, 70% of respondents said that their compensation programs were influenced by the guidelines of proxy advisory firms.4

While it is evident that investors do not follow proxy advisor recommendations in lockstep—far fewer compensation plans have been rejected by shareholders than by proxy advisors—issuers need to be cognizant of the extent to which their major holders follow proxy advisors’ policies and also what factors trigger the greatest dissent.5   A March 2012 study by academics at Columbia University, Duke University and the University of St. Gallen, concluded that proxy advisor recommendations were the key determinants of SOP voting outcomes in 2011.6   According to their findings:

  • A negative ISS recommendation was associated with 24.7% more votes against SOP.
  • A negative Glass Lewis recommendation was associated with 12.9% more votes against SOP.
  • Negative recommendations by both proxy advisors led to 37.9% higher voting dissent.

However,  the  degree  an  “against”  recommendation  affected  shareholder  votes  depended  on  the severity and nature of concerns raised by the proxy advisor.  The study found that dissent was higher when ISS cited multiple areas of concern, such as PFP and change-in-control agreements, or when Glass Lewis assigned an “F” grade to a company’s PFP.   This underscores what many investors have been saying for years:   although they use proxy advisors’ research to screen companies for further examination, they will still make their own voting determinations.

Guidance for Issuers

When preparing and drafting your compensation plan, it pays to know your shareholder base.  Who are your top holders?  Do they follow ISS or Glass Lewis, or do they have their own internal voting guidelines for evaluating executive compensation?

With assistance from their advisors (proxy solicitor, legal counsel, etc.), issuers should analyze their shareholder base to determine the levels of influence ISS and Glass Lewis have on their investors.  This

analysis should also identify those holders that maintain their own internal voting guidelines.  As with the policies of ISS and Glass Lewis, issuers should familiarize themselves with the critical vote drivers their top institutional investors will use to make their SOP decision.

When drafting the Compensation Discussion & Analysis (CD&A) section of the proxy statement:

  • Be clear when telling your story
  • Include narrative:  many of the vote decision makers at the major institutions are not industry experts, help them understand your compensation decisions.

Issuers can take a number of measures to avoid or deflect a negative proxy advisor recommendation on SOP.  Indeed, 91 companies were able to prevail in this year’s shareholder vote on SOP in the face of negative recommendations from both ISS and Glass Lewis—in some cases by a strong margin (over

70%).  To date Alliance has identified 18 companies that received over 70% support despite negative recommendations from both ISS and Glass Lewis.

As an initial step, issuers should become familiar with proxy advisor policies on executive compensation and stay apprised of any revisions to them in advance of proxy season.  While it is difficult to reverse- engineer  black  box  models,  ISS’s  and  Glass  Lewis’s  proxy  reports  and  websites  provide  some transparency of their PFP methodologies and their checklists of problematic pay practices.   Issuers should expect changes for 2013.  Glass Lewis has already announced a partnership with Equilar, an executive compensation research firm, whereby Glass Lewis will integrate Equilar’s market-based peer groups and realizable pay data into its PFP model for annual meetings beginning in July 2012.  ISS, for its part, is likely to rethink certain aspects of its PFP model for 2013, particularly its choice of peer groups, in view of the severe blowback it faced from issuers this year.

For proxy season issuers, Alliance recommends a targeted outreach campaign during the late summer and early fall.   During the solicitation period it pays to “hope for the best, prepare for the worst.” Prepare a strategy outlining whether to engage communications with a proxy/compliance department contact(s) and/or the buy/sell side which will help determine responsibility (who will reach out to whom—whether a proxy solicitation firm will handle the initial outreach call or whether the company should be involved).     In addition, prepare to have a team from the issuer available to speak with investors on their concerns.

It is impossible to over-emphasize the importance of ongoing engagement with top holders, even if the issuer’s SOP vote was “safe” this year.  ISS and Glass Lewis give additional scrutiny to companies who received less than 70%-75% approval on SOP in the prior year.  However, as witnessed this season, changes to proxy advisors’ compensation models can unexpectedly shift companies to the SOP penalty zone.  While it is difficult to reverse an unfavorable proxy advisor recommendation—short of modifying a compensation plan—the best way to diminish proxy advisors’ influence is for the issuer to make its case directly to its major shareholders, both in terms of dialogue and proxy disclosure to help win over their support.

Don’t be reluctant to refute an advisory firm(s) in a supplemental filing.   Some advantages of filing

supplemental material are to (i) strengthen their case on compensation decisions and practices (ii)

address any flaws or inaccuracies towards the advisory firm report(s) and (iii) provide information that can be passed along to institutional vote decision makers that may not have the time to speak during proxy season on SOP.

Every vote counts.  Make a concerted effort to reach out to investors that can make a difference as well as considering solicitation tactics to drive in support from the individual investors whether it be a phone campaign and/or follow up mailings.

For further information, please contact Alliance Advisors, LLC at: Phone: 973-873-7700

Email:    This email address is being protected from spambots. You need JavaScript enabled to view it.


1During all of 2011, 43 SOP proposals failed: 1.3% of the total.

2The 12 S&P 500 companies that failed SOP through June 25, 2012 are Abercrombie & Fitch, Best Buy, Big Lots, Chesapeake Energy, Citigroup, Cooper Industries, International Game Technology, Mylan, Nabors Industries, NRG Energy, Pitney Bowes and Simon Property.  The six S&P 500 firms that failed SOP in 2011 are Freeport-McMoRan Copper & Gold, Hewlett-Packard, Jacobs Engineering, Masco, Nabors Industries, and Stanley Black & Decker.

3The IRRC Institute/Tapestry Networks study is available at http://www.irrcinstitute.org/projects.php?project=57.

4The Conference Board study is available at https://www.conference-board.org/retrievefile.cfm?filename=TCB-DN-V4N5-12.pdf&type=subsite.

5In 2011, ISS opposed 11.9% of SOP proposals and Glass Lewis opposed 17.2%. Investors voted down 1.3% of SOP proposals.

6The academic study is available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2019239.


Appendix A:












% FOR*


al Filing

Abercrombie & Fitch Co.







Actuant Corporation







Adobe Systems Incorporated







AECOM Technology Corp.







Affymax, Inc.







Affymetrix, Inc.







AK Steel Holding Corporation







Akamai Technologies, Inc.







Allegheny Technologies Incorporated







Altera Corp.







American Eagle Outfitters, Inc.







Argo Group International Holdings, Ltd. (Bermuda)







Artio Global Investors Inc.







AsiaInfo-Linkage, Inc.







Associated Banc-Corp







Atlas Air Worldwide Holdings, Inc.







Autodesk, Inc.







Avid Technology, Inc.







Bank of New York Mellon Corporation







Best Buy Co., Inc.







Big Lots, Inc.







Brink's Company







C. R. Bard, Inc.







California Water Service Group







Career Education Corporation







Cedar Realty Trust, Inc.







Central Federal Corporation







Cenveo, Inc.







Charles River Laboratories International, Inc.







Chelsea Therapeutics International, Ltd.







Chemed Corporation







Chesapeake Energy Corp.







Children's Place Retail Stores, Inc.







Chiquita Brands International, Inc.







Citigroup Inc.







Cleveland BioLabs, Inc.







Cogent Communications Group, Inc.







Community Health Systems, Inc.







Comstock Resources, Inc.







Comtech Telecommunications Corp.







Concur Technologies, Inc.







CONSOL Energy Inc.







Consolidated Water Co. Ltd. (Cayman)







Cooper Industries plc (Ireland)







Cousins Properties Incorporated







CryoLife, Inc.







Cutera, Inc.







Delcath Systems, Inc.







Devon Energy Corp.







Digital River, Inc.







Doral Financial Corp.







Dun & Bradstreet Corp.









ECB Bancorp, Inc.







EnergySolutions, Inc.







EnPro Industries, Inc.







Enzo Biochem, Inc.